Marel hf

ICEX:MAREL

Earnings Call Transcript

[Tinna Molphy, executive]

Good morning, and a warm welcome to our fourth quarter and full year results. My name is Tinna Molphy, and I'll be your moderator in today's session, where CEO Arni Oddur Thordarson and CFO, Stacey Katz, will go over the financial results and some key business highlights. If you would like to ask a question, please do so via the "Raise your hand" feature in the built-in Zoom or alternatively, you can e-mail us a question to [email protected]. With that, I'd like to hand over to CEO Arni Oddur Thordarson.

[Arni Thordarson, executive]

Thank you, Tinna, and welcome, everybody, to our fourth quarter '22 and full year results. To say the least last year was eventful. It was a year of challenges in the food value chain. The consumers are shifting the consumer behavior, trading down to poultry, for instance, from meat to trading down to more affordable solutions. As well the flow in the food value chains were facing challenges, bottlenecks. As well as in overall the global value supply chain overall. At the same time, Marel managed to sequentially increase revenues throughout the year. Part of that was the blast in beginning in the order intake that was very, very strong in the first 2 quarters, and we kept the momentum throughout the year. A little bit colored to say the least the operational results. We started fourth quarter [indiscernible] '22 and 11% EBIT that is way below our historical operation performance 14%, 15% and way below our future target. When we report 8% EBIT, 6% EBIT, we rebound to 10% and a closing this quarter at slightly above 12% EBIT.In [ a change ] in a world, where we start the year in lockdown situation for 1/3 of our people, just to recap, the Russian military invasion in February into Ukraine and the inflation that took on an increased bottleneck in the supply chain and completely changed the flow. What to do? We need to accelerate our journey. We are guided every single day by our vision and our financial targets '23 that is this year, end of the year. And our strategic and growth targets '26, where we are going to be one stop-shop with 50% recurring revenues from service and software, compared to 10% [indiscernible] and compared to fabulous 40% in '22.We took on many, many business activities to -- maybe I should have some rough type of revenues here, when I'm talking, I'm so excited to talk about the year and go through the year. We took on many, many actions to improve the flow and the flex. While I was describing many things that are outside of our control, then you cannot handle business like that, you have to say, what can we -- I -- what can we do? And what can we do in partnership with our partners, suppliers and customers? So we have been investing in infrastructure projects to automate and digitalize the flow of spare parts as we have gone through. Global distribution center will be ready in '24 and then regional distribution centers. So we can shorten lead times. We can be closer to the customers and serve and get higher share of the wallet in Asia on even level to Europe, U.S.This is a journey, but we are seeing the fruit of it. We are having 11 quarters in a row, where we are increasing the perpetual recurring service and software revenues. They are perpetual, as long as we are customer-centric, and we are with our customers. So we believe that we increased the intrinsic value significantly last year in Marel. And now we have to show the stock market that we are now showing the operational results that we are aiming for. Once again, we adjusted it down to 14%, 16% in the back end of this year. We are showing 12.4% in this quarter, but we are closing.The ramp-up of revenues were slightly higher than we expected, but that -- there, we were collared by the bottlenecks in the past. To recap, I've said when we are 40%, 50% of trailing revenues in order book, we should be able to deliver revenues equal to average of 3, 4 quarters passed in order intake. That meant we had EUR 40 million, EUR 50 million in cuts, meat, if we look at last 12 months. We were okay toward our customers because all the suppliers were late and the customers were too late. However, customers are very pleased with our deliveries in fourth quarter. It's a culture and we show here what we can. And it's not enough that the CEO or the top management believes in the 14%, 16% EBIT or the 50% recurring revenues, the whole organization needs to be unity. And this is showing what we can. Of course, it doesn't come without a cost. The gross profit is only 36% in the quarter.The composition of project is higher than in past quarter compared to standard equipment and spares and services. Spares and services are 39% in the quarter, although it's slightly increasing compared to third quarter, that was a record record quarter in aftercare. All in all, this sums up to 12.4% the increased revenue of course cover the operating costs very well, operating cost below gross profit is 23.5% in the quarter compared to target of 24% the back end of this year, 23%. We -- our aim is to gradually increase the gross profit and stay on course in 6% R&D cost and 18% SG&A.Why are we putting the absolute number in EBIT here, EUR 61 million? We have said Marel is a growth company. We need to grab the market share. We need to have the economical scale. And business results are a combination of the growth and EBIT and we are obsessed with cash flow as well.So cash flow is colored last year by increased inventory to deal with the environment, our cash flow model is unchanged. It's colored as well by book-to-bill or order intake vis-a-vis revenues. And to recap, order intake was very strong in '21 as well. Book-to-bill was high. Book-to-bill was very high in the beginning of the year and the order book matters to balance out the lot. That's very important how we deal with our system here, and book-to-bill is close to 1 when we closed the year. So order intake in fourth quarter is slightly higher than third quarter if we adjust for currencies, but we don't adjust for currency. So it's slightly lower as we reported -- the momentum is pretty high, and I will go deeper into it here when I go through the industries. EUR 61 million EBIT compared to the record in the past, EUR 52 million. If we extract Wenger, we are at same level as the records.Of course, we have higher debt, but that's Wenger acquisition, just not [indiscernible]. It matters a lot. What are we aiming for and back end of the year with the EBIT bridge. It's not to report 14%, 16% EBIT in fourth quarter and then drop to 8%. We are aiming for sustained business result of 14% to 16% EBIT.And looking then into our growth and combination of growth, EUR 60 million EBIT, we are aiming north of EUR 300 million in EBIT in '24. Meaning that we are aiming for operating cash flow somewhere between EUR 350 million and EUR 400 million in '24. Our historic cash flow conversion is 120% to 125% of EBIT. This is the name of the game in value creation. It is hard to understand when companies continue to innovate 6%, invest in infrastructure that takes on one-off costs and goes for the growth. But we are guided by these financial metrics and as well our growth target '26. And then be on, how can we get the traceability fully to the consumers.Just to flag, we have before said gradual improvements throughout '23. As it looks like now, it will not be gradual. We wrapped up a little bit higher than we expected in the fourth quarter. So it's not unlikely that we go slightly down in revenues in first quarter with less operating cost coverage. But at the same time, we are targeting gradual improvement or improvement at least in the gross profits, although leaner, higher in the [ bucket ].Most important is this year, we are not only going after 14%, 16%. We are balancing out '26 target 50% revenues from recurring and the EBIT level. So we are not going here after short-term profits, we are balancing out.Then I move fast, poultry momentum, extremely good throughout people trading down 16.5% EBIT 2 quarters now in a row. Share price here meat reporting 8% for investors after we went down to minus 4%, plus 4% and 8% in recent quarters. Here, we are closing projects at better results than we expected. That, we took as well, crossover the company, 5% reduction in the workforce in the middle of the year. As you remember, ask nearly every single company is doing in first quarter '23. We did it in middle of '22, necessarily to do it and our grand scheme of things is to have even-steven number of employees in back end of '23 as we had in middle of '22. 8,500 employees approximately and increase the output per employee like our customers do.Anyhow, well done to execute the projects at this level, close them at this level and rebound partly 8% in meat. We are guiding though soft result in meat in the first 2 quarters of this year. We have endless of levers to improve the profitability here in meat, namely cross-selling and selling the fabulous solutions that we have in secondary meat. And improve the service profitability in meat in line with how we do the service in poultry.Fish, very much colored by the acquisition of Curio, Valka, integration there, we are not adjusting for it. It teaches us that it's pretty difficult to take over a company that is on digital journey. Valka was on digital journey, way behind Marel, but anyhow, outstanding promises in the digital journey, and now we have to combine those platforms. In all other acquisitions, we have had standard equipment or solution or companies that have not been on the digital journey. Anyhow, we are working hand with hand with our customers out in the field. We started the year with a record, record order intake, a softness in fourth quarter in order intake due to the taxation in Norway, proposed taxation, let's say, that in Norway due to the -- in the salmon industry, starting on a pretty good momentum, though in beginning of this year. Because people need to find the ground for automization and to serve the fish market all in all.Then we come to plant, pet and feed. I would say this is portfolio management par excellence. Aiming of this acquisition, we should be proud. We are in plant-based proteins. We are not in what you're reading about here in the -- you never ever see us use the word, alternative meat. We are here in plant-based and pet. Pet market is lucrative. And later on, we will intensify as well the aqua feed.Order intake fabulous, operational result good. We are having here in now our part of the quarter -- recent 2 quarters around 15% EBIT above that. A little bit color to the fourth quarter by the portfolio from Marel that was on lower profitability than on Wenger. So actually Wenger is showing a higher result than this in fourth quarter, it was a little bit reverse in the third quarter. However, the opportunity of cross-selling and up selling on a good gross margin. And remember, maybe we moved slow, towards the '16, we changed our vision into food instead of poultry, meat and fish, '22 we acquire Wenger. We didn't want any other platform in the industry. Wenger is 6% innovation every year, handling the product with care, keeping the nutrition, just like our [indiscernible] portion just like our hamburger [indiscernible], just like our intelligent [ oven ] that takes on and builds the full line in the industry.But welcome the team Wenger, actually team Marel now and very enjoyable working side by side with you out in the field and in the operation. It's -- I think it was good timing as well for you, getting the strategic direction and willingness to go fully global and invest in a platform. All in all, sums up, more diversified revenues, industry-wise, revenue mix wise, and processing steps wise. 40% service revenues compared to 10% [indiscernible] while we grow, we increase the quality of earning and decrease the risk in the business.

[Stacey Katz, executive]

Thank you, Arni. Thank you all for being here today in person and online as we present our Q4 2022 results and full year results as well. Overall, a solid year, where we saw a strong growth in order intake above EUR 400 million per quarter and a ramp-up in revenues in the second half of the year to end at the record of EUR 489 million in revenues per quarter. I will start off going through Q4, and I will then switch over to the full year. We are pleased with the improvements in the quarter. We have been talking, in recent quarters, about our book-to-bill ratio, our healthy order book and our journey to ramp up revenues. Q4 is a quarter where we delivered a record of EUR 489 million in revenues, as mentioned. This is 33% growth year-over-year, 17% acquired -- 17% organic and 16% acquired. The significant and successful ramp-up took a lot of hard work and dedication of Team Marel in the challenging environment. We did see this quarter as a catch-up quarter, as Arni mentioned, where we see first signs of parts availability issues easing, and we were able to deliver a number of projects to our customers with strong performance on revenues across the segments.Aftermarket revenues are at an absolute record again this quarter, EUR 191 million, 39% of revenues in the quarter, which also shows how strong the timely ramp-up of customer deliveries was on the project side. Orders received at EUR 413 million in the quarter. If we look net of currency and we compare Q4 to Q3, Q4 was actually higher than Q3. So we do have currency tailwinds and headwinds that are impacting the numbers. Order book at EUR 675 million, 39.5% of trailing 12-month revenues at a healthy level.Gross profit impacted due to the challenging market conditions in the year and the cost of ramping up as well. It will be important to see improvements in gross profit to be able to hit our 2023 target in the back end of the year. EBIT here had an absolute record of EUR 61 million, which translates to 12.4%. We see here the increased volume as well as better cost coverage kicking in, amongst other actions taken in the second half of the year, such as the global headcount reduction.Free cash flow in the quarter at EUR 10 million with stronger results in the operational side. Leverage ended the year at 3.6x net debt to EBITDA from 3.9x in Q3. If we look at the improvements, about 2/3 are due to a stronger EBITDA and 1/3 due to currency on the net debt. Good signs of deleveraging, and we expect to continue to be within our targeted capital structure of 2 to 3x net debt to EBITDA by the end of the year. Due to the positive movements on leverage, we will see some benefits on interest costs in the coming period, which do balance out the increasing interest rates since we reported Q3. EUR 11 million cash out per quarter on interest and finance costs still applicable for the first half of 2023 based on what we know now.Already mentioned financial highlights, so we'll run through just a few key additional points on the income statement. Selling and marketing expenses, coverage improved due to higher volumes at 11.1% in the quarter. G&A seeing results from shared services coming in though offset by salaries and consultancy costs at the moment. SG&A at 18.4% compared to the targeted 18% end of 2023.R&D a bit lower than normal at 5.1% in the quarter, numerous solutions coming to the market end of the year, which will enable sales in the coming years, especially on the digital side, which Arni will cover in a few minutes. This will result in higher R&D expenses in 2023 with lower capitalization and higher amortization. Non-IFRS adjustments in the quarter elevated similar to Q3 due to the amortization of the purchase price allocation for Wenger at EUR 17 million, which will remain elevated until mid-2023.Acquisition-related costs, EUR 2.5 million, still a majority of that due to Wenger in results of the share grant and as well in terms of consultancy and EUR 2.9 million of restructuring costs related to the 5% global headcount reduction. The 5% global head count reduction is ending at one-off costs of EUR 8.4 million for annualized savings of EUR 25 million. So we did end with actual slightly lower than our estimates previously.Net finance costs elevated, as previously mentioned. Also included in the Q4 figure is FX headwinds, costs related to our new USD 300 million facility included in cash out in the quarter.For the full year, 2022, great to highlight the ramp-up in revenues, EUR 1.7 billion for the year, up 26%, where 16% is organic and 10% is acquired. Aftermarket was 40% of revenues in the year, growth of 27% of aftermarket revenues year-over-year. Here, we really see our investments in our end-to-end spares journey paying off.Orders received in the year EUR 1.7 billion, full year book-to-bill ratio of 1.01, higher in the first half of the year with the record intake balancing out in the second half of the year with the ramp-up in revenues.Full year free cash flow at minus EUR 18 million, which is below expectations. We did see improvements in Q4, and we are putting good focus on rebalancing our working capital, moving towards historical cash conversion ratios with our strong cash flow model. Significant investments in the year with our end-to-end spare parts journey and our global distribution center in Eindhoven, our new facility in Nitra in Slovakia and our new warehouse in Boxmeer.EBIT in the year, 9.6% below expectations overall due to the challenging market conditions, especially in Q2, improving in the back end of the year due to actions put in place, as mentioned, our full potential program as a global top priority to support margin expansion.There is currency tailwinds in the year due to the strong U.S. dollar and Marel having a higher proportion of revenues in dollar setting costs.To spend a minute on the outlook, looking forwards. So last quarter, we discussed gradual improvements towards our 14% to 16% EBIT run rate at the end of 2023. Due to the timing of customer deliveries and the easing of parts availability, we were able to have a strong quarter, ramping up revenues in Q4 and delivered to our customers, which is great. The ramp-up allowed for better coverage in our operating expenses, resulting in a 12.4% EBIT. We continue to see a good pipeline also driven by the current labor challenges of our customers and the increased need for automation and digitalization in food processing, and we are committed to our 2023 targets. We do see elevated uncertainty at the moment due to the macroeconomic backdrop, which may lead to nonlinear results and variability between quarters going forwards.In terms of cost developments, 2022 saw increasing costs across the board, raw materials, components, labor, freights, with inflation. We have seen some signs of easing on the increases of costs; freight costs, for example, are easing on some routes. However, our main route from The Netherlands to the U.S. is still elevated due to congestion. We do see higher labor costs entering 2023. These are built into our pricing analysis and actions.To cover the points, not mentioned so far, gross profit in the year, up on an absolute basis, though down as a percentage due to the previously mentioned supply chain challenges. SG&A in the year at 20.1% compared to 19.4% last year. The run rate is trending in the right direction at the back end of the year with the higher volumes, as mentioned. R&D at 5.7% for the year, in line with our promise. Non-IFRS adjustments already explained earlier. But just to be clear, we are only adjusting for acquisition-related expenses, purchase price allocation and restructuring to the costs related to the 5% global headcount reduction, which is now closed.Book-to-bill in the quarter 0.85x, showing the ramp-up in delivering projects to customers that we've been talking about over the last quarters, when the book-to-bill was above 1. Average 1.01x for the year.Order book in the year peaked in Q2, though still at a healthy size at the moment, EUR 675 million, EUR 81 million included from the acquisitions of Wenger and Sleegers in the year. Good to remember that the order book is financially secured with down payments.Cash flow, improving in the quarter with operating cash flow at EUR 44 million on the back of stronger operational results and first steps in rebalancing working capital. The lower book-to-bill ratio of 0.85x is impacting cash flow, as mentioned also last quarter. Free cash flow at EUR 10 million for the quarter, including continued investments in the business. Operating cash flow of EUR 96 million for the full year, minus EUR 18 million free cash flow, which is below expectations, operational performance, higher working capital, continued good investments as well as one-offs related to acquisitions and restructuring all impacted. Our strong cash flow model is in place with down payments secured for orders. We ramped up our working capital during the pandemic to deliver to customers due to market challenges and will now focus on rebalancing our temporarily elevated working capital to move towards historical cash conversion.Assets increasing in the large part due to the acquisitions of Wenger and Sleegers. We then also have a bit of an increase in inventories and trade receivables due to volume. If you compare the assets to Q3, we are continuing our work on the purchase price allocation for Wenger and making some good progress there. That does account for a few shifts on the balance sheet. Compared to Q3, we do see improvement in our inventories due to actions already enacted, the amortization of the inventory uplift for Wenger and U.S. dollar movement. Full year inventory increase is largely related to acquisitions, cost price increases being built into inventory and some ramp-up in the first half of 2022 to deliver to customers.Trade receivables in the year increasing due to acquisitions and volume. We are focusing on rebalancing our working capital. And have already seen good steps on this from Q3 to Q4. On the equity and liability side, the borrowings increased due to the Wenger acquisition. We signed a new USD 300 million term loan in Q4, which repaid the EUR 150 million bridge facility earlier in the year for operational headroom, leverage at 3.6x, improving from 3.9x in Q3. Borrowings decreased about EUR 30 million in the quarter linked to the movements on the U.S. dollar. Part of the Schuldschein will mature later in the year. We do have availability on the revolver to be able to cover this, but we are also looking into the possibilities in the debt capital markets. Contract liabilities and assets driven by the book-to-bill ratio.Earnings per share is targeted to grow faster than revenues. Basic earnings per share for trailing 12 months was EUR 0.0778 per share. Net result, though, being colored by one-offs, such as the 5% head count reduction, the purchase price amortization of Wenger and costs surrounding integrations and investments. We see improvements in earnings per share if you look at the back end of the year with operational improvements in Q4.Dividend policy is 20% to 40% payout. The Board of Directors will propose a 20% payout of dividend at the 2023 Annual General Meeting, which is EUR 0.0156 per share or EUR 11.7 million.Back over to you, Arni.

[Arni Thordarson, executive]

Thank you, Stacey. And we are very proud that we pumped out more than ever in our innovation front. We invest 6% every single year in good years, not great years and not so good years, and it's essential to keep on transforming the food processing. We need to finance this with engaged people that has customer centricity and with EBIT and cash flow. Otherwise, that's how we finance our dream. So it's a prerequisite the EBIT and the cash flow. That's why we have the '23 target. Let's look at the '26 target. What do we mean by 50% software and service. It's not only to get those fabulous recurring revenues it's to transform the way for this process. In the service side, we are moving from original reactive to proactive to predictive that's interconnected with our digital journey and our focus on service. We are as well introducing new digital solutions that improve efficiency out in the field. War changed the industry into demand-driven instead of supply-driven. What do we mean? There is the right product in the shelves in the supermarket on Fridays to prevent out of shelf or too much that leads to discounts on Mondays. I don't know what the picture is there.It's the impact to improve the operation profit starting in the poultry industry stand-alone product that is getting a lot of attention and already installations out in the field. Then we will cascade similar products to the other industry starting in poultry.The ProFlow, you have heard me talk about one primary processing 15,000 chicken per hour going to multiple [indiscernible] depending on the products, depending on the value forecast, et cetera, et cetera. Here, we are selling not only in the poultry, but in the fish industry as well moving into the ProFlow to maximize the flow between the primary processing and the secondary processing.Just -- we could not do this if there were not intelligence in our products, connectivity in our products, same digital platform in our products. Imagine all the investment that we have been taking on since 2017 when we started and synchronizing the digital platform. We said, "Dear Investors, you will not know this" -- it was the '17, we said this -- "significant change in our digital revenues until 2024." We have been investing in this hampering our EBIT and our investments. Now it's '23 tomorrow is '24.And Nuova-I is a critical starting point in the poultry processing industry. Here, we are adding the intelligence. We are seeing the yield improvements of this and interconnection with later stages in the poultry industry. We have the largest installed base of Nuova and many customers are looking and modernizing and replacing.FleXicut here new versions into the game into the [indiscernible] or salmon industry, into the maximizing better the white fish industry and next steps, obviously, to cascade this to other industries.i-Cut 360, originally invested in the fish industry now targeting with a new solution and versatility to cut the meat thinner than ever through portioning. This is important. All the Latin speaking world is on day-to-day speaking -- day-to-day, having that demanding a thinly sliced, to switch it on a pan, even though we sometimes picturize that good weather on barbecue than the day-to-day life is to switch it on pan. Now we in Northern Europe, U.S. as well want to save the time thinly sliced, even [indiscernible] so we can switch it on a pan. And not everybody have the luxury, as people here in Iceland that the energy prices are not skyrocketing. It is saving the energy tremendously that you can switch on a pan for 2 minutes instead of cooking for 6, 7 minutes. This matter. And here, we are on the right time with thinly sliced meat going to the market. Leveraging our Danish part of our operation in portioning and combined with the TREIF portfolio, we are the leader of the packing portion -- when it comes to portioning in the world.Maybe strange to see 2 items here from the fish industry because fist accounts only for 11%, 12% of our revenues. What is exciting about FilleXia, it's a new field. It's a new revenue stream. It's a tilapia, automatic, the tilapia industry, as we have been doing with the North Atlantic whitefish and the salmon industry. So helping out, well done [indiscernible] well done team in the business division. And furthermore, the unity and cooperation helping out free for sale -- and remember, there was a COVID 2 years, before this year. We managed to keep the efficiency and innovation throughout.ESG, very proud. This is my passion. Heading the Nordic CEOs for a sustainable future, we are hitting all our targets in our sustainability journey. Last year, you know it gets then harder and harder. We are on the leader in the TCFD reporting. We are proud of the gender balance, and we have set targets and we measure our results. Otherwise, you don't achieve targets. There's no difference here for financial metrics.Wenger, I touched on that, timing excellent, portfolio management, par excellent. Soft robotics just to mention, Sleegers has been mentioned, that partnership that ties on many prominent investors, where we are investing in robotic technology in -- unless the company where we share the knowledge and we can burn cash on faster rate than we can in the listed company of Marel. Here, we are testing the water in partnerships out in the field with forward-thinking customers and other investors out there.Unchanged target, very important. This year, we will celebrate 40 years anniversary. We are very young, but this pictures the smile in the University of Iceland. This is actually before the year 1983 where it is a project. However, the thinking has always been the same. Here, we are collecting and electing data for our customers, making solutions there and moving on. It's hard for me to try to look 40 years forward. However, as we see it, the growth 4% to 6% on average for the next 20 years is at least equally exciting as last 20 years. And Marel has been growing 20% a year from '92, year of 2/3 acquisition of growth. Of course, when consolidation comes even more consolidated and there is less consolidation growth, but the industry is so fragmented, still needs to develop and our organic growth opportunities through softer service and closer to customer is fabulous.Team Marel has changed in composition, more diversity, more diversity in education and [indiscernible]. But stay tuned 17th of March, we will celebrate the 40 years. A very young Marel.

[Tinna Molphy, executive]

Okay. Thank you Arni, thank you, Stacey. I'm very keen to open this up to the floor for the Q&A. So let's start with the online audience. I see that Klas Bergelind from Citi has raised his hand. So please go ahead, Klas.

[Klas Bergelind, analyst]

So first, on the gross margin, it's a bit weaker than I thought. It's still costly to deliver out of the backlog. Are you raising prices now yet again here on new orders? Or do you think that pricing you have now in the backlog will be sufficient to expand the gross margin as we enter 2023. I'm thinking against current inflation. We don't know what will happen ahead, i.e., whether you're hiking prices further? Or if current pricing is efficient as you deliver out of that higher-priced backlog? I will start there.

[Arni Thordarson, executive]

Yes. So recap what we have said. In second quarter and third quarter, we said after the price adjustments there, we said we are sufficient covered. We are on -- we want to be fair. We are on same level in pricing as when we were delivering 15% EBIT. We said it takes time to filter through. We said that the service revenues would filter through in third quarter. Standard equipment would filter through in fourth quarter. And the project revenue due to delivery on average would filter through second or third quarter this year. So we are taking price adjustments like -- Stacey went thoroughly through what items are taking on inflation. And that is to cover the inflation that is coming in, in '23. So no, we are not going higher in prices with, of course, the exemption of unique portfolio that we are introducing, where we go to value-based pricing, unique software and unique services. We are testing the waters, learning here on -- its payback in this industry should be 2 to 3 years, not in the unique solution that sometimes is counted in months. So -- and we are doing it quarterly next year instead of on yearly. And then the trick is that the spinning wheel between procurement commercially is working well and et cetera. But I'm very pleased with how we have set up the pricing teams inside Marel, and it's all about price cost. So yes, we go for pricing discipline, but we believe we have sufficient coverage to achieve 40% to 60%.

[Klas Bergelind, analyst]

My second one is on the margin in meat. I mean looking at the group, you get good leverage from higher revenues, but the revenues in meat didn't come in well ahead of my expectations. It suggests more underlying improvement looking at the margin. I mean meat has struggled here last couple of quarters. You say that you closed projects Arni, you got better margin towards year-end. But was that a one-off then with meat and trending lower again to the low single digit in the first quarter. Just to understand the sort of trajectory from the 8%.

[Arni Thordarson, executive]

It's more likely than not that we trend partly down in the first and second quarter in meat. But like I said, we have endless of levers. We took on the cost down across the company was average 5% reduction. And however, if I look now our team meat in recent 4 to 6 weeks, where we are looking at redefining our operating model, I'm very pleased with how people are moving and see what needs to be done. And we need to improve as well the delivery terms of profitability and the servicing needs. So it will take some time, and we don't want to be clear that we are here and rather focusing on what we will achieve in third and fourth quarter and sustain business result '24 and onwards. We say, not without the reason, and the strategic and operational review.

[Klas Bergelind, analyst]

Yes. That's good. Don't get me wrong. It's good to see the bad result, as you state, the trajectory from current level. Then on my very final one is on the cash flow. EBITDA is improving, but you're delivering better cash flow despite the lower book-to-bill, that suggests that underlying working cap is better. How much of this was due to better working cap from better parts availability as you delivered out of the backlog versus your new distribution centers, you work in improving the spare parts availability on your own.

[Stacey Katz, executive]

I think it's a bit hard to give an exact number in terms of improvements, but I think we both have made improvements in terms of our end-to-end spare parts journey and our distribution centers, et cetera. And then I would also say that parts availability issues have kicked in; eased a bit. I would then also say that, in general, putting a lot of focus now on rebalancing our inventory, like we said in Q3. And I think we are really starting to also see attention from the focus as well. So even though you still see, let's say, working capital moving in the wrong direction overall, it's really because of the book-to-bill. So we did see improvements on inventories, on receivables, and we are going to continue to work on this going forward.

[Arni Thordarson, executive]

Maybe if I can applause the team as well, we are not only seeing improvement, where we are working here in Netherlands, in Denmark, Iceland. We are seeing improvement, for instance, in U.S., after very, very hard work of the people. We were not satisfied with the interlink U.S. and Europe and the flow of spare parts, but we are seeing now, after hard work dedication, team U.S. and teams in our business division working together, improvements and clear performance and delivery. So very important to keep the -- that good work continuing.

[Tinna Molphy, executive]

So next up, we have Andre Mulder from Kepler.

[Andre Mulder, analyst]

Two questions. First question on savings. Is this 5% cut on the workforce, EUR 25 million of savings. How much that you already realized in '22? And how much is in store for '23? Second question is, could you please disclose your covenant ratios?

[Stacey Katz, executive]

So perhaps take the second question first. We do not disclose our covenant ratios. So I think that, that's an easier one to answer, let's say.

[Arni Thordarson, executive]

Bank coverage, net debt is below 3.5 now, and we have announced that we have acquisitions spike et cetera. So we are very below the threshold.

[Stacey Katz, executive]

Yes. And then in relation to the annualized savings, I would say about 1/3 has kicked in now, 2/3 still to kick in. So that's similar to what we mentioned in Q3.

[Arni Thordarson, executive]

Relation with this is that we are asked not only cutting the workers we are rebalancing the workers, in different flows in the world and software and service and et cetera. So grand scheme of things matter as well instead of looking quarter-over-quarter, even this is a short period, 6 quarters, we are going for double-digit growth here. And as we did last year, we are aiming to be even-steven in number of employees in backend to '23 compared to middle of '22.

[Tinna Molphy, executive]

Next up, we have e-mailed questions from Akash Gupta from JPMorgan. His first one is on pricing. Can you talk about pricing in Q4 versus input costs and particularly the backdrop of declines in some costs like materials, logistics, while general inflation still remains high? Is there a need for prices to go up further for you to reach 16% margin in the medium term? On contrary, is there a risk that pricing may turn negative if some of the inflationary headwinds ease?

[Stacey Katz, executive]

I think it's a good question that we did already partially cover in the earlier question, I would say. Did go through it when we walked through the results that in 2022, we did see cost increases across the board. I think entering 2023, I think it's important to mention that we do see easing on the increases, but we still see increases. So that is just something important to mention also with labor inflation, et cetera. In general, as Arni already mentioned, we believe that we are at the right price levels at the moment. We don't necessarily expect now that it would go up or down, for example, but we're running a quarterly cycle, where we bring in all of our inputs, and we then make decisions to make sure we are at the right price levels to be able to achieve also our targets.

[Arni Thordarson, executive]

Yes, it's a dynamic world and we run quarterly cycles instead of yearly cycles. We don't want to overshoot in prices either. We want to be competitive. We believe we are on the right prices. There is, even though material prices are going down. The biggest route is still expensive in transportation. There are signs with profit warnings, forward looking, by shipping companies but those routes are going to a more normalized level this year if you look at the numbers there and so on. However, there is inflation in salaries and there are many other. We want to cover this. It's not fair that we take the short straw here. We want to be fair. We have pioneering solution and services. So we adjust this and work closely quarter-by-quarter.

[Stacey Katz, executive]

I think it's also good to mention it's not just inflation in our salaries, it's also inflation in our suppliers' salaries. So I think that's a good one to also think about it in the total context.

[Tinna Molphy, executive]

His second question centers around the 2023 target and reads. "You guide 14% to 16% exit rate of margin in 2023 and introduced a 2% buffer due to uncertainty. Based on what we know today, what is your thinking on the 200 basis points reserve? And if today's environment sustain, would you still need this margin buffer?"

[Arni Thordarson, executive]

I can take this one and be very firm. Yes, we need this buffer. And we are entering into this year. We are redefining our operating model and et cetera, and we need levers from that to push us up to EUR 60 million. As it looks now with the uncertainty in meat, et cetera. We are closer to the 14% and 16%. And then we have extra levers to draw in cooperation in-house and as well getting the selling in the secondary and et cetera. But we have many levers. And cautiously, we don't account for that when we talk with our Board of Directors about financial forecast. But we are redefining how we work, but has as well more efficiency in that we are going after. And we are not then counting all the tailwind in currency because it tends to fluctuate back, as you saw, partly in fourth quarter. So all in all, we want to remain this buffer of 14% to 16%. Remember, it was only in second quarter, "Why don't you rethink, you will never make more than 12%. Now the question is, do you need the buffer? It is extremely volatile world -- our customers are now reporting much less margins than they used to in U.S., for instance. And the higher interest rate should they invest or not? Yes, labor market is hot, labor scarcity is there, and it's binary, either if you mixed the best of your people in the factory, there's no flow if you're not automate. So now you need to invest to increase the automization and you have sustainability commitment. So it is not easy to calculate the timing, but we need to buffer, yes, 14% to 16%.

[Tinna Molphy, executive]

Okay. And his third one is on margin mix. You said in the release that prolonged inflation, rising interest rates and global recession have historically shifted consumer demand as well as investments in the food industry from large projects towards standardized solutions, aftermarket and less capital-intensive projects. Shall we assume this should be a tailwind for margin, given lower margins in projects relative to standard equipment and service?

[Arni Thordarson, executive]

It's embedded in our target of 40% gross profit, yes. Yes, it's unusual mix and after cost in fourth quarter, leading to only 36% gross profit. So the answer is yes, things -- the change of mix tend to move slower than people think, and we are with the exemption of the recurring aftermarket revenues and software revenues, but standard equipment and project lines, but it's unusually high large project and [ forecasted ] in the revenue mix. So yes, the answer is yes. But let's not put a very strong tailwind on that. It's a gradual tailwind, but it's tailwind.

[Tinna Molphy, executive]

Okay. Perhaps I'll open this to the floor. Any questions from the live audience here today? Yes, please go ahead. Just hold on, we have a mic for you.

[Stefán Guðjónsson, analyst]

I'm Stefan from Arion Bank. I want to ask you to talk about the leverage ratio or the leverage to EBITDA ratio that you have posted. Will we see it gradually come down? Or is it something that -- or do you have like a time line for when you should reach the targets?

[Stacey Katz, executive]

Yes, sounds good. So we saw good improvements from Q3 now to Q4. And as I mentioned earlier, that was like 2/3 due to the operational improvement, 1/3 due to currency on the net debt. We are expecting that leverage will continue to decline in terms of the pace. That's a bit of a question mark in terms of the next quarters, in terms of varying versus gradual, but we do expect to end the year within our targeted capital structure of 2 to 3x net debt to EBITDA.

[Arni Thordarson, executive]

But average for 5 years were 125% cash conversion. And that's our mode land we are sticking to the model.

[Tinna Molphy, executive]

Okay. Any more questions from the room? Okay. If not, then if we -- so maybe just to remind just from IR, we have a consensus of course, on marel.com and make sure to follow us on Twitter. With that being said, I think we're really happy to finish on time. Thank you so much for coming today, for your attention and your continued support for Marel. Thank you.

[Stacey Katz, executive]

Thanks a lot.