U.S. Markets closed

Edited Transcript of MARL.Ry earnings conference call or presentation 24-Oct-19 7:30am GMT

Q3 2019 Marel hf Earnings Call

Gardabaer Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Marel hf earnings conference call or presentation Thursday, October 24, 2019 at 7:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Arni Oddur Thordarson

Marel hf. - CEO

* Linda Jonsdottir

Marel hf. - CFO

* Vicki Preibisch; Investor Relations

================================================================================

Conference Call Participants

================================================================================

* Akash Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Eric Wilmer

ABN AMRO Bank N.V., Research Division - Analyst

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Sveinn Þórarinsson

Landsbankinn hf., Research Division - Equity Analyst

* Tijs Hollestelle

ING Groep N.V., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Vicki Preibisch; Investor Relations, [1]

--------------------------------------------------------------------------------

Welcome to Marel's Third Quarter 2019 Investor Meeting Conference Call and Webcast. My name is Vicki Preibisch, Investor Relations; and with me I've got CEO, Oddur Thordarson; and CFO, Linda Jonsdottir.

In today's meeting, Oddur will go through the highlights of the third quarter, and Linda will provide more details on our financial performance. Oddur will then present and give more discussion on our business outlook and the 2 acquisitions that we announced yesterday. We aim to keep today's presentation to around 25 minutes and after take your questions with people -- with the audience first on the phone and then you here in Gardabaer, Iceland. Thank you.

And with that, I'd like to hand over to Árni Oddur.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [2]

--------------------------------------------------------------------------------

Yes. Thank you, Vicky. Good morning as well. This has been an eventful quarter and days after the quarter as well as usually in Marel. We are not only having fun, but we are dedicated in what we are doing. And usually, I start with the numbers, but let's go a little bit backward. Yesterday, we got a prize here in Iceland to be example of good cooperation in a society. We got as well special prize for corporate responsibility, social responsibility. We are very proud of that. And just to recap, it's in our DNA. We are reducing waste, both by our customers, increasing the yield from 60% to 80% in the fish sector, reducing the waste through the value chain and partnership with our customer, reducing water, reducing electricity.

However, because we are a global company, originally based in Europe, then we have been flying in, flying out too much around the globe. So our carbon footprint is too high, like every other capital goods company's here in Europe. So we are now localizing our business, "think global act local," and localizing the service business out there, reducing fly in, fly out, but we are, as well, then servicing our customers better. We understand better the needs around the globe, and we reduce that footprint and we save as well money, both for our customers and ourself.

However, the structure usually in corporation to achieve localizing the business is that preventing the business at home. However, it's totally different when we start to talk about lower carbon footprint. So even the Works Council is pressing the top management to go faster in globalizing the business. So this is recognized.

The day before we closed or signed the acquisition of Curio, Cedar Creek in Australia as well. In the past, we signed a partnership with TOMRA to take their sensor technology on new [nevo] on new states. However, this would not be possible if our team and our partners, the customers were not dedicated in what we are doing. We are showing great operational results. We are growing, and we are having a good cash flow. So this goes all in hand. It doesn't fight with each other, the social responsibility and the cash generation, it complement each other.

So just unusual beginning on quarterly results, but seasonal quarter order intake pretty strong compared to seasonal quarter, even though we were aiming a bit higher. It is a 7% increase compared to last year. And we have once done in third quarter a higher quarter, it was in the Costco quarter as it has been named in third quarter 2017.

However, revenues are increasing faster than the order intake, 11% in this quarter, 11% year-to-date. EBIT as well increasing 11%, and this sounds 11, 11, 11, but it should sound 11, 11, 11 because earnings per share are increasing by 11% as well. That's maybe what we are very proud of because, as you know, we issued new CS in beginning of the summer when we listed in Amsterdam and net profit are increasing by 25% between years.

Very pleased to see cash flow back on track. When order received are lower than revenues and revenues are higher than we expected due to 37% spares and service, we are more service-focused. We are both in front end, back end, but more important, the demand from our customer is that we come even closer as maintenance partner. So service revenue that come in, that come out in the quarter, run very fast, hardly touched the order book. So revenues are bit higher than we had originally expected and order intake a bit lower, leading to book-to-bill 0.9 and taking back into account the free cash flow is exceptionally strong in this quarter in line with, though, what we have seen in the past and we are having stronger than peers cash flow usually because our customer prepared their greenfields and we run spares and services faster and faster through our book and standard equipment. So pleased to cash flow at this stage, and it finance the investment in the infrastructure, it finance the acquisition and it finance all our approaches in the market.

We need to fix a little bit this picture because we are showing a static picture here on the right from you, left from me in the cake. But what maybe the mix of greenfield spare part services and standard equipment, this is what we are aiming for, always 1/3, 1/3, 1/3. It fluctuates a bit and revenue recognition bit in quarters. This quarter was unusually high in greenfield revenue recognition.

We see as well gross profit 1% lower in this quarter and in beginning of the year, even though the OpEx is then low and the EBIT is at 14.2%. I would highlight that we are delivering the biggest projects that we have ever delivered. It took 2 years to produce some of the projects and to install them and get them running and all dependent, and the installed projects is not done and we are maintenance partner going forward. But you have seen many companies announcing some warnings about the post-calculation is not to the same pre-calculation. Our gross margin of greenfields is a bit lower than standard equipment or spares, however, it's fully in line with our pre-calculation, and now we move into maintenance partnerships with those projects. We are securing new projects as well in this quarter.

Revenue recognition on standard equipment pretty low in this quarter. That is on high gross margin, however, spares and services as well pretty high. So greenfield higher than usually. Spares and services higher than usually. Standard equipment lower than usually, to give you insight on the mix.

Geographical mix, good. 25% here both outside of Europe, U.S.A. As I said in beginning of the year and will restate now, more than 40% new orders are outside Europe, U.S.A. It's a dynamic shift in activity in Asia and China. Here, we are seeing some of the spares and services conflict in the revenue recognition in Europe, U.S.A. and as well it's the project that we took on 1 year ago, but order intake so far this year is 40% outside Europe, U.S.A., showing maybe the challenge that we, our customers and everybody are dealing within the current environment.

Poultry continues to deliver well, although a bit lower than in last quarter, and recent quarters good profitability. Order intake a bit lower now in recent 2 quarters than we are used to. In the last orders in poultry, France, Taiwan, China and U.S., all coming in, in large orders this quarter. And like we stated in last quarter, we would not be surprised in U.S.A. to see investment moving from primary to secondary. The world will not be the same after trade constraints. You need to censure your products. You need to have traceability to be able to participate in global trade of food.

Meat, robust order book in meat. A lot of activities in meat. This year, we have never announced as much as we have announced in IFFA in secondary meat processing, that's not yet in. This is more or less primary plant's activity, and we expect now to move through the value chain in all the new sensoring technology, SensorX Magna, Accuro et cetera and partially in meat.

Fish, as stated from second quarter last year, order intake in greenfields pretty slow for nearly now 1 year. When fish has been doing excellent job and then increasing standard equipment modularization becoming more trustworthy maintenance partner in the field. This quarter starts unusually well with 2 large transactions. It is in Australis in Chile. It's a SALMON factory that we signed in beginning of this quarter and then Brim here in the Reykjavik that we signed as well last week. The industry Brim is in the whitefish and Australis in the SALMON industry. So Curio as well step forward, I will touch on it after Linda. We are coming step-by-step a full-length provider as we have promised and it is essential to penetrate Asia, China because people start in primarily processing, move then into secondary processing and et cetera. So changed a bit the game for us in the fish industry to have Curio, our friends that have been working in the field with us among the group and cooperation out in the field.

Earnings per share, nothing new here, continue to increase, although challenged to issue new shares. We will keep discipline in acquisition, but we will, as well, deploy the capital, and this is fighting with each, rather deploying the capital. Those acquisitions, I mentioned, don't take a lot of capital and our leverage is 0.5. We feel very comfortable to be out of our target in current environment in the world. 0.5 is not our long-term target. It's 2x EBITDA and in some cases are around acquisition to go up to 3x, but we feel very comfortable at this point in time to be at this financial strength. Linda?

--------------------------------------------------------------------------------

Linda Jonsdottir, Marel hf. - CFO [3]

--------------------------------------------------------------------------------

Hi, everyone. Good to see you here this morning. I'm going to take you through the highlights of Q3 2019. We had solid operation. Even though it was a seasonal quarter, we saw strong revenues. Looking at the order intake, it was at the level of EUR 285 million, which is slightly lower than we aimed for, but still 6.5% higher than the same quarter last year.

Revenues strong, EUR 313 million, also 37% coming from service and spares, which is higher than we have seen before.

Profitability at a level of 14.2%, the same percentage as the Q3 2018, but still close to 11% improvement in absolute terms.

Cash flow strong, both operational cash flow and free cash flow leverage at a level of 0.5, slightly going down from last quarter. So it's clear we still have ample room for further strategic growth, even though we took very good steps in the quarter, acquiring Curio and Cedar Creek.

Order book at a level of EUR 432 million, which is 33% of trailing 12 months revenues, slightly below our target of 40%. But overall, very strong operations, and I'm going to take you through the details.

If we start with the revenues and orders received, as I stated, like seasonal quarter with solid revenues, you can see that orders received at a level of EUR 285 million, 6.5% higher than last year. Revenues although growing faster, so they're growing by 11% compared to last year, which means that the book-to-bill ratio is now at a level of 0.91. Our target is to be above 1, but like at the moment, revenues have been increasing faster than the order intake.

Order book 33% of trailing 12 months revenues, and very important here is the healthy mix seeing spares and service at the level of 37%, which is the recurring revenue part, so very strong development there.

Steady operational performance. This shows from 2014 how we have been developing from a level of 6% to a level of between 14% to 15% EBIT. Currently, this quarter, 14.2%. Year-to-date, we are at the level of 14.7%. So very strong operational performance with gross profit this quarter at the level of 38.2%.

Looking at the OpEx. S&M 11.4%. We are investing in the front line. We are investing in the regions with our globalization efforts. On the R&D side, we keep on investing there now at the level of 6.3%. We have been investing quite heavily both in fish and also in our software, and we will continue investing heavily in innovation for future growth.

G&A at a level of 6.4%, substantially lower than the same period last year. And we saw that also last quarter, but what we do foresee though is that the G&A is a bit back-end loaded this year because we have quite some strategic projects ongoing that will come in G&A in the fourth quarter.

EBIT margin 14.2% and increasing 11% from last year.

As stated before, we can expect to see fluctuations between quarters because it's about product mix and timing of large projects, but quite steady operational performance.

Order book at a level of EUR 432 million. As you can see here in the picture, this year, all quarters' order intake has been below revenues. So that's why the order book is going down this year, like now at level of EUR 432 million, but still you can see that order intake has been increasing by 3.5% if you look at year-to-date numbers 2019.

We don't book anything in the order book unless it's financially secured. And when we see this kind of geographical shift, we are also moving into areas where it's slightly more difficult to predict exactly the timing of when we have the financial security. But overall, well-diversified order book, both by size and also by delivery times.

Income statement. If we go through it line-by-line, revenues growing 11% now EUR 313 million, gross profit EUR 119 million, 8% higher than last year. OpEx in line with expectations. Adjusted result or EBIT, EUR 44 million or 14.2%, same percentage as last year, but 11% improvement. PPA-related cost EUR 2.7 million in the quarter, same as last quarter. Net finance cost EUR 2 million compared to EUR 2.9 million last year. There is some effect there from -- some currency effect, having positive impact compared to negative one last year. And here you can see that net results EUR 33.4 million compared to EUR 26.7 million, which is a huge increase, 25% improvement between years.

Balance sheet, not a lot to mention here. But on operating working capital, if you look at the quarter, that's decreasing by around EUR 5 million in the quarter. You see some movements in inventories, a slight increase in the quarter. We are making sure we deliver to the customer in time, and then we need to make sure we have the right spot to be able to do that. So there are some, like, strategic increases on the inventory side. Trade receivables going down. Cash balance is high because we did the equity issue in Q2. And otherwise, very limited changes here.

The balance sheet, as stated before, leverage 0.5. We have ample of flexibility because our targeted capital structure is between 2 and 3x net debt-to-EBITDA. And looking at the working capital on the liability side, you can see that contract liabilities are going down, which is related to order book going down.

The main areas that we are focusing on all the time is on earnings per share, is on the free cash flow and leverage. Earnings per share, there we want to grow faster than revenues. Trailing 12 months earnings per share is now EUR 0.198 compared to EUR 0.172 last year. Here, we are focusing on, as we have mentioned before, margin expansion in fish and meat, also focusing on overall improvements in our operations. And if you compare EPS in the quarter, it was EUR 0.438 compared to EUR 0.39 last year.

Free cash flow, solid, EUR 29 million in the quarter compared to EUR 10.4 million last year. And tax paid around EUR 11 million or close to EUR 12 million, which is slightly higher than our normal quarter, but we will see that on a lower note in Q4. And overall, like, we continue using part of our cash flow to invest in our business, we are spending less now on improvements in our facilities because we have done a lot, but we continue on the IT front. We are continuously implementing IT systems and we've been doing that over the last few years. Now the highest on the agenda is SAP implementation. We did it now in (inaudible) in April, and we are coming here to Gardabaer in November. I think like in projects like this, it really -- it's heavy lifting. So it takes great team efforts, and I'm really proud to see how the team is working together across all locations to take Marel forward. So I want to also send special thanks to the team that is working here day and night to get this done. But we continue improving our platform so we are able to continue growing as we have been growing.

And on the leverage side, 0.5 and clear that we have opportunities to continue growing the company with strategic acquisitions.

So this is all I was going to say, but like overall, good operations, and we're happy with the results.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [4]

--------------------------------------------------------------------------------

Thank you, Linda. And just to emphasize, I'm as well very proud of the team for the implementation. Just -- in the old days, when I was an investor, I had a rule when companies were implementing SAP, you should short them and buy them 18 months later. And that's not the case in Marel. We have already done 70%, 80%, and very, very well, it's -- we have already done U.S.A., we have already done U.K., we have already done Denmark. We are now doing Iceland, we have to do it in right sequence. It's product life cycle management implementation first, mastering the data first, and then, we implement SAP in the final meters. We have done in the HR system, sales force, ServiceMax and et cetera, et cetera, in recent years. We want our customers to be on the forefront in IT so they can steer their companies. We need to lead by example and be on the forefront and have the best toys and tools to assist us in that but they are just assisting us. It's in the end our team, common sense and how we tackle the business.

The generation shift in poultry, Roger Claessens that has been 18 years with us, leading the innovation in poultry, taking over from Anton. Anton 38 years in the company, will stay with us 2 more years. Very, very good natural shift taking place here in good harmony, Roger Claessens. Of course, there will be some changes with new people and normal generation shift taking place, but Roger Claessens has a lot of respect from our customers and our employees.

Once again, Costco, even though we have much more customers than that, but so large project done and opened last Saturday. It was a very joyful day to participate in the opening of the Lincoln Premium partner factory and that is owned by Costco, run by on Lincoln Premium partner on behalf of Costco. Costco is the only customer, and this is huge initiative. All in all, the investments around this, (inaudible) only on Costco, but the community as well is USD 1 billion. It's EUR 450 million from Costco because they are investing in the feed mill, they are investing in the hatchery, they are investing in the whole value chain because they want to have traceability from corn to the shelf for their customers. So they are investing.

The CO2 footprint is low because the corn and soya is from Nebraska, where we are located here with this factory. And Marel has nearly all the toys and tools inside the factory and installing this magnitude in one go requires a good partnerships between the customer and ourself and third-party installation crews in this case because the magnitude was so high.

What are we doing? Live bird handling on a new level, we care for the animals. When we care for the animals, we get as well better quality meat, just to underpin that. We have an air chilling in this factory that increase the quality as well and (inaudible) wings, et cetera, et cetera, but just to give the number, 100 million roasted chicken per year through Costco, 100 million. It's 40% of their sales. It's around 40% that goes through this factory. This factory can handle 2 million chicken per week. So amazing to see, amazing they talk to the farmers, talk to everybody around this. It's really uplift for the economy that is in good shape though in Nebraska, but seeing the power and the enjoyment of doing things differently sense you to moving things forward. First indication from store manager in Costco that is the customer is that the quality is good, it's a tasty chicken and even better than they have seen before.

Cedar Creek, a software company in Oceana, very nice niche acquisition, getting closer ties to mainly the meat customers there and some modules that we can potentially use in Innova and so on.

TOMRA strategic partnership that we announced in the quarter, we don't need to invest everything in Marel. It's very important to say that both to our engineers and others that Marel is moving very fast. Even though we are investing 6% in innovation, even though we are on the forefront in central technology, in poultry, meat and fish, then we see other players having other capabilities. We can assist TOMRA with our technology, TOMRA can assist us in our field. So the challenges are contamination. It's not only bones, it can be plastic, it can be many other things. It can be wood impressed in the chicken industry, et cetera, and the sensor technology in general. We will not solve it all with TOMRA. We will invest and are investing in innovation, but there are some objects that we can work on together and continue to transform the way food is processed.

Curio, acquisition in fish. We have said that our biggest challenges now are modularization, standardization in meat to get to the profitability here and it's becoming a full-length provider in fish. It's very, very important again to be a full-length provider in fish. When we go to Asia, China, we sit our customers and they say, it's interesting to see what you have. You have the robots, you have the sensors, you have the FleXicut. However, we need to start to automate the primary processing and of course that's the case. So what happens if we spend sales and marketing cost in Asia, China and so on today, they start to buy from our competitors primary processing and talk maybe to us 3 years later. That's not how we want to do business. If we spend money and invest in sales and marketing across coverage and we have the sales and service network out there, we want to serve from the very beginning in primary, move up then the ladder in secondary and so on.

Curio. 10 million in revenues doesn't sound high. However, this is a great company, was recognized as a venture company of year here in Iceland. Their main market is Nordics, including Iceland, Norway and U.K., mainly Scotland. But those family-run companies, even though they are making great equipments, they are not making full line. They have not digitalized enough to execute out in the field that have interconnected with Innova, and they would need to spend more than the future cash flow on building of sales and service units in Americas, Asia and so on.

So why not join Marel? I've already said why Marel needs Curio. It is a really, really good fit, and we are closely gaps here in primary processing in fish. However, it will be part of the fish numbers from 2021, not next year as we are buying this in 3 steps. The company are [inevitably] joining forces, but 40% today, 10% next year and then we have an option to acquire the remaining in 4 years' time. So really, really, good company. It was only taking 5, 6 years to finalize this 1, even though you see lower number. We care for those companies. We have a high respect for the family-run companies. And for me, personally, it is giving you a lot speaking with those people and you're learning a lot.

When those families have been so long in the business, both German companies, Dutch companies, Icelandic companies, U.S. companies and that's part of what I enjoy most, just to be honest, talk to customers, talk to those peers, our innovation teams and then all the team members in Marel, but I have to say it's the innovation team, the innovation and it is those competitors and customers that I enjoy most.

Unchanged outlook, so let's not spend time on that. Let's go in Q&A.

--------------------------------------------------------------------------------

Vicki Preibisch; Investor Relations, [5]

--------------------------------------------------------------------------------

Thank you, Oddur. It's time for Q&A. We will start with the participants on the call first and then take your questions here in the audience. So Apita, over to you, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Akash Gupta from JPMorgan.

--------------------------------------------------------------------------------

Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

I have 3 questions please. My first one is on order pipeline. Maybe if you can talk about how does your order pipeline, particularly for large orders, looks right now compared to, let's say, 3, 4 months ago and maybe if you can comment about whether some of the orders have gone out of the market maybe because of these geopolitical uncertainties or you see all of the order still there but just taking longer to close. So that's question #1 and then I ask after this.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [3]

--------------------------------------------------------------------------------

So Akash, thank you. The question is about the order pipeline. The order pipeline is pretty good. However, if we start on the negative side, we have seen in Europe delays more than in the past and it's very, very well understandable. What to do if you are European provider? We have trade constraints or trade war between U.S. and China. What will happen if China and U.S.A. don't resolve it, but U.S.A. and Europe solve it? Then we have overhang of supply from U.S.A. into Europe. We have the Brexit looming and et cetera. How well -- as well, there is a looming over potential supply from Brazil for instance. And what to do? I know what to do. It is to invest and stay competitive. But it's understandable that some hesitate in this environment.

However, Eastern Europe is investing, planning to then import into Europe. You have to automate. You have to have the traceability. Markets here of Marel is very strong in Eastern Europe, Western Europe, North America and Latin America. So we are trying to working on all of those access, but clarity is needed. However, then you think is as well because 30 billion of food exported from U.S.A. over to Asia and et cetera half now. Then there are investment ongoing in Asia, China and et cetera.

Brazil, China opening up a agreement factory by factory for export/import, so that is coming in as well. And then the African swine flu has stopped investment for time being in the primary processing of pork, not fully stopped, and that is going to accelerate now. So the pipeline, to sum it up, pretty good pipeline, takes longer time to finalize it and I know to never book our order until its peak date and financially secured all the way. Long answer to a short question.

--------------------------------------------------------------------------------

Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

And my second question is on service and spare parts. We had very high service of -- service and spare parts revenue in the quarter. How much of that is reflection of increased installed base and therefore, these high levels are more sticky? And how much of this was due to some sort of one-off that you expect won't be repeated?

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [5]

--------------------------------------------------------------------------------

There is -- on the spares and service, there are no one-offs in this to underpin that. And if we analyze our installed base, then, in many cases, we can get a bigger share of the wallet there, but more important, our customers are asking us to come closer and become a maintenance partner even closer out in the field because they want to maximize the value, minimize the waste and increase overall quality and make it affordable poultry, meat and fish, want Marel to be one-stop shop in providing equipment, solution and services.

So the demand is even greater than we are showing in our numbers. We are coping up, and we are seeing a huge increase in spares and service and become even to back that. So we are investing now in fast moving parts and critical parts, and we will continue to do that to accelerate the growth and service the customer even better.

--------------------------------------------------------------------------------

Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Is it then fair to expect that there may be some upside to gross margins in the next few quarters? I mean this quarter, we had some dilution from greenfield sales. But once that go away, is it fair to expect that there may be some upside to gross margins that you are delivering?

--------------------------------------------------------------------------------

Linda Jonsdottir, Marel hf. - CFO [7]

--------------------------------------------------------------------------------

I think like last quarter, we had close to 40% on the gross profit. We are slightly lower now because we had higher portion of greenfield projects. It will fluctuate. So -- but if you think about the long run, like what we've said, is that we are focusing on margin improvements both in meat and fish and that in the end should deliver us the better profitability.

--------------------------------------------------------------------------------

Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

And my final question is on G&A. I mean you said, Linda, that you expect the ratio to pick up in Q4. But I'm wondering, is it fair to expect that, for the full year, G&A ratio would be somewhat lower than 7.1% you had reported in 2018?

--------------------------------------------------------------------------------

Linda Jonsdottir, Marel hf. - CFO [9]

--------------------------------------------------------------------------------

So it will be -- it's difficult for me to comment on such an exact percentage, but like it will be -- like, if you look at 2019, it will be higher than the earlier quarters of 2019. So Q4 will stand out because of strategic projects we have ongoing.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [10]

--------------------------------------------------------------------------------

Yes. But it will be under 7.1% for the whole year. That is our assumption. But might be, why is it higher? And Linda said strategic moves that are not most but strategic project that we are not announcing acquisitions here beforehand. We working here on a sprint with McKinsey in sales coverage. We believe that we can cover better both standard equipment and smaller and medium-sized customers in Asia, China and around the globe. And we are as well taking a sprint in digitalization, even though digital is in the DNA of Marel. Then we -- sometimes we need outside-in view on that, and our team and McKinsey are working on that. Most companies who get [as] one-offs such sprints, we follow it through our lines and that's why Linda said it will go through G&A next quarter.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And the next question comes from the line of Klas Bergelind from Citi.

--------------------------------------------------------------------------------

Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [12]

--------------------------------------------------------------------------------

It's Klas from Citi. A couple from me, please. Can I also start by asking about services there at 37% of sales, very solid? Send my regards to Ulrika. So can we please break this down in the quarter? It sounds like sales from long-term service contract added already strong spare parts. Just to clarify that comment. And how much of sales was Innova, i.e. software in the quarter? I will start there.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [13]

--------------------------------------------------------------------------------

Yes. So the spares and services are natural when we have been installing and you see the revenues of greenfield so high in recent quarters, even though we have been able to keep the gross margin at 39%. So we have been installing a higher magnitude that we are used to in greenfields are. And that's our live line out there for first to business, first to partnership. So it's a natural movement there as well proportionally service level agreements are increasing. However it's a low level in Marel compared to many other capital goods companies, and we can do better there. But it's more based on trust. So like in the poultry industry here, that is the highest in spares and service. It has been in the past very seldom a service level agreement, but rather it goes on, and we service the customer immediately after installation.

So it's a natural movement from the past installation, and service is coming higher and as well we focus on our core business and more and more customers. There is consultation among our customers. They want us to take care of this one-stop shop, and they want to focus on their business. So I think as well that this movement that is accelerating.

So can we cope with it? Are all customers always happy? No, but we are striving for excellence, becoming better and better, delivering better and better. The request of current generation that is coming into business is to know within 5 seconds when the spares and services will arrive in the core or online. We are not yet there, but we are striving to get there. So it will become higher and higher.

The final question was a tricky one, how much is Innova part of the aftercare business. It is a low single digit, but I know you are not satisfied with that because both 2% or 3% are low single digit. It's moving upward in that direction. It's not more than that, but we are investing in it, and it's moving, though, on a very, very high percentage rate but moving from 2% to 3% maybe out of the total. We are within that bucket there, but we are now working on different go-to-market strategy and have been investing to recap 40 to 80 people in innovation only in Innova software last year. So more to come there.

--------------------------------------------------------------------------------

Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [14]

--------------------------------------------------------------------------------

Okay. That's very good. My second one is on poultry. How did orders fall in poultry? We have obviously tough comp there on larger orders, but I'm interested in the development in Europe. How did orders develop in Europe year-over-year? And if you could comment on the recent slowdown versus the downturn in 2012, '13, that's our last reference point. Just we get some color only on the magnitude versus what happened during the Eurozone crisis. Now it's obviously more oversupply concerns but yes.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [15]

--------------------------------------------------------------------------------

So obviously, Europe, in general, [prettily] PMI's negative in Germany but moreover in the poult industry. We knew in beginning of the year that we were having a much tougher year in primary poultry processing in U.S.A. Knew as well that in Europe, people were a little bit hesitant and et cetera and then knew that there were opportunities in Asia and China.

If you look at our forecast at beginning of the year [on tax], then Europe is lower than we expected. U.S.A. is as we expected, and our actions to go into secondary processing instead of primary, and Asia, China is a little bit higher than we expected. So we have 3% growth in order intake year-to-date. That's of course under our long-term targets. However, we see fluctuation 0%, 7% 15%, 2%, et cetera, in recent 25 years, on average, 6% per year, and we will continue, on average, 6% a year next 20 years.

So this is the situation. The question was about Europe. I think in my intro, I went very explicit in why it is, I think especially under food, on top on low PMI in general. So this is the situation. But is the pipeline [active] in Europe? No, not at all. There are very interesting protests going, and the need for modernization of current plant is pretty high in Europe.

--------------------------------------------------------------------------------

Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [16]

--------------------------------------------------------------------------------

All right. My second or my next one is on meat, and I'm reflecting on the recent approvals by China and Brazil in September. That's a lot of CapEx over 20 plants, should benefit you and Sulmaq. We're obviously seeing interesting dynamics following the swine fever. Higher pork price in China should drive more automation but could also see increased demand in meat in other regions, i.e. substitution effect. The first, when do you expect your business in Brazil to benefit from the plant approvals? And how do you look at the substitution effect from the swine fever?

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [17]

--------------------------------------------------------------------------------

Yes. So Brazil is already getting in business due to this, and there was some agreement for over 20 plants last quarter between China and Brazil, plant by plant to open up. So we have to recap. Since Brazil is one of the bread baskets of the world, since 2015, we have been in downturn in Brazil. Some of the factories closed, poultry factories and et cetera. We have been reopening factories. I always say we. I'm talking about the value chain because we are in partnership with our customers. We have been reopening factories that were closed, both in poultry and meat, especially in poultry in Brazil in last quarter. That means that we need to come in, check the status of the factories, upgrade some, maintain it. Now we are in the area of building those factories. And when we build those factories, we need new greenfield investment in it.

So it's very positive signs in Brazil. We are yet not seeing all the investment needed in China. Last quarter, a complete ban on moving live animals between provinces in China in the pork industry. So that will be interesting. How will we solve it when the farming industry is nonconsolidated? We will most likely go for several meat, small- and medium-sized, processing plants with a full sensoring, full traceability and et cetera. So yet to come and very, very understandable that it doesn't rush in when we totally need to rethink the value chain out in -- on there to prevent same magnitude of fevers as we are seeing now begin again. But that's the challenge, and that's the task ahead.

--------------------------------------------------------------------------------

Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [18]

--------------------------------------------------------------------------------

Very, very quick final one on the mix in poultry. I get the dynamics on Costco. But should we model a similar mix over the next quarter and maybe into next year? Or was this an exceptional quarter? And can the acceleration of standard equipment effective already by the fourth and into next year?

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [19]

--------------------------------------------------------------------------------

So ask the impatient CEO about the standard equipment. If we sell standard equipment, we turn it very fast into revenues. We are working now, like I said, on first in analyzing our sales coverage. We are not fully satisfied with the sales from standard equipment. If you look at our value proposition out in the field, we should see higher numbers there, and I believe that we will now gradually shift the mix again. And we show a very interesting sales for sensors and traceability and portioning into U.S.A. last quarter. So it will -- would be -- not be a surprise that we will see a gradual shift. Whether that will be fourth quarter, first quarter, second quarter, I don't know, but the mix will be different, a higher amount of standard equipment.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from the line of Eric Wilmer from ABN AMRO.

--------------------------------------------------------------------------------

Eric Wilmer, ABN AMRO Bank N.V., Research Division - Analyst [21]

--------------------------------------------------------------------------------

One question. You mentioned sizable Q3 orders within the meat division in the Netherlands and Germany. I was wondering whether you could distinguish these orders between being the result of having a more complete offering, both the MAJA acquisition in the third quarter last year and as a result of African swine fever.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [22]

--------------------------------------------------------------------------------

Yes. So the order intake in meat has -- I think that the large orders are not fully related to either the African swine fever or the MAJA acquisition. It's rather then when we get the smaller orders into sensoring, traceability and et cetera. It is a huge need for optimization in the meat industry. That is behind the fish and the poultry industry in general in optimization.

So it's the catch-up effect that has been coming in. MAJA acquisition is paying off. We are seeing increase in sales of skinless through MAJA. Very nice volumetric portioning as well coming in. It's the schnitzels. It's the fast switch in [compound] portions in meat and et cetera, largest being in Germany and et cetera. So it's good sales there, but large projects so far are not fully related to African swine flu. It's rather a catch-up in optimization. Eastern Europe as well, we have had [this] in China for a long time that they have been consuming more than producing and it's more severe now. So it's not directly related but rather to come.

--------------------------------------------------------------------------------

Eric Wilmer, ABN AMRO Bank N.V., Research Division - Analyst [23]

--------------------------------------------------------------------------------

Okay. If I squeeze -- if I may squeeze one question in. You also mentioned your Brim deal was the largest in a while in white fish. What has changed for this deal to land? And could you give an indication of order size?

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [24]

--------------------------------------------------------------------------------

Yes. So we don't give the sizes of our transaction, but in general, the greenfield transaction are 2 to 3 -- 30 million. And we have said maybe the Costco transaction is twice what we have seen in normal, and the fish transaction -- transactions are smaller than we are seeing in poultry and meat, but more interesting is the revolutionary solution we are bringing out there.

Will it revolutionize the fish industry? Yes. We need to get into the position in the fish industry that we deliver bone-free portions. It's not a hazard to have bones in fish, but our kids stop eating fish -- not -- maybe not my kids, but in general, stop eating fish if there are bones in the fish. So that is the #1 reason, and we want to make a delicious, tasty fish without a bone. And the natural cut for instance [from my stand] is now selling on 70% of the price of the farmed salmon. Farmed salmon is great. However, the wild fish should be on a higher price, but we need more steady supply or more steady quality, are seen by the customer, and that is what we are going to transform with Brim and all the customers in the fish industry. And you have to wait until next spring or next autumn to see the factories, so it will be a reference plant.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

I've gotten a follow-up question basically on your comments about the software order levels in poultry as well as the large orders in final stage execution. To me, it seems that you are a bit more concrete about a potential weakening of the poultry-related business. So how should we look at this? And so let's say, for the coming 2, 3, 4 quarters, how much leeway does the business have before you see a decline year-on-year in the revenue of the future quarter? For instance, fourth quarter last year was the second highest ever in poultry. And I assume that the recurring business in poultry is much higher compared to the group average. That should provide some cushion. So yes, if you can give us a bit more clarity on the short term of the top line of the poultry, that will be quite helpful.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [27]

--------------------------------------------------------------------------------

Yes. Thank you for the question. Maybe I'll start and Linda can go deeper in it. This is what I love about the culture in our company, the Dutch versus the Icelandic. When -- if we see opportunity in it, how cautious and et cetera, but it's up -- we are warning not with operation that our highest profitability unit is having some soft order intake in the quarter. That is, of course, people are always asking why don't you give an exact guidance on how your profitability will be. We rather want to give educated investor insight in our order book, what we are doing and et cetera. And there has been softness in order intake in poultry compared to the -- what we are used to, the high growth, and softness means maybe not like in many other companies that is negative. It means that we are used to 6% growth. So when we say as well robust order book in meat and softness in fish until this quarter, then people can see that there is a little bit softness in poultry.

Spares and services, though, on a very high proportion in poultry of the total business, standard equipment as well in secondary. So we have a leverage here and there in the operation, and our poultry business is not going anywhere unless up because, imagine, we are having last year EUR 630 million in revenues in poultry, spares and service. How many chickens are commercially slaughtered to consume in the world, 62 billion. So every single year -- [62 billion] in value. So we're around EUR 630 million and we are on the forefront of the industry, in transforming the industry. So optimization is needed especially in China, Asia and et cetera.

And the question last quarter was do you expect the continuous growth of poultry much higher than the average of the group, are you not worried about the growth of the fish. This is why we are in poultry, meat and fish. We need them to step up profitability as well in the fish and meat. So all in all, we are upbeat long term in poultry, cautious short term, and we are excited about the midterm because we have seen when there is softness, some call it a catch-up because when you have the bottle and then suddenly everything goes on, it is this, call it, catch-up effect. And we have always seen the pipeline is good in poultry. But operation, it can fluctuate quarter-by-quarter.

--------------------------------------------------------------------------------

Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

Okay. I appreciate your extensive answer. I saw that you have a trade show coming up in mid-November in Copenhagen in poultry. Do you normally get a lot of clarity on customer CapEx programs on that trade show or the visibility?

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [29]

--------------------------------------------------------------------------------

Yes. I would rather say -- and sometimes, we get a concrete data, but it's more like an art than science. You get in more and very close this question, and moreover, you listen to our customers talk to each other. And that's very often powerful. And we are showing the newest of the toys and tools there as well, so it's a lot of excitement. So it's rather art than science what we get out of the trade shows.

So I think there are questions here. I think the trading in the market is starting and so on but open for more questions. And traded in, in the Netherlands from early this morning so...

--------------------------------------------------------------------------------

Sveinn Þórarinsson, Landsbankinn hf., Research Division - Equity Analyst [30]

--------------------------------------------------------------------------------

Sveinn from Landsbankinn. Sorry for holding you guys. Just one very quick question. On the meat segment, the order book seems to be robust like you say. Do you expect in the short to medium term then margins picking up because it seems it's been kind of maybe stuck between 10% to 12% despite revenue growth? Can you just give us a small comment?

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [31]

--------------------------------------------------------------------------------

Yes, it's an excellent question. Actually, the same question I asked the management team in our last year meeting, business review meeting. Why is the margin not higher? So we have been deep diving into that step by step. Maybe that is not what we are -- when the poultry goes slightly down, then of course the guys with the highest order books should have a higher EBIT margin. But it's consisting a lot of primary processing plants, and we are moving then to the standard equipment in the secondary.

We need to cross sell and sell more in meat to take the EBIT up in the meat. However, standardization, modernization is going fine and it's -- is on track and even going faster than I expected but fully in line with the targets of the people. That will change how we will manufacture it and make it more easy to manufacture maybe part of it in Slovakia and et cetera, but it's the prerequisite to be able to do that. So we are not expecting short-term improvements there, but both mid-term and long-term targets are to improve the EBIT and all regions is to, long term, to operate meat at 50% plus in EBIT.

--------------------------------------------------------------------------------

Vicki Preibisch; Investor Relations, [32]

--------------------------------------------------------------------------------

Thank you for attending today's third quarter results investor meeting here in Gardabaer and for the people on the webcast and conference call. We look forward to staying in touch with you and speak to you in the coming days. Thank you.

--------------------------------------------------------------------------------

Arni Oddur Thordarson, Marel hf. - CEO [33]

--------------------------------------------------------------------------------

Thanks.

--------------------------------------------------------------------------------

Linda Jonsdottir, Marel hf. - CFO [34]

--------------------------------------------------------------------------------

Thank you.