Marel has been very visible this week. It published excellent half-year consolidated financial statements where among other things the company reported that the operating profit for the second quarter was the largest ever, or about ISK 399 million, and that the profit for the first six months was ISK 115 million.
- Marel has a clear vision
Marel has been very visible this week. It published excellent half-year consolidated financial statements where among other things the company reported that the operating profit for the second quarter was the largest ever, or about ISK 399 million, and that the profit for the first six months was ISK 115 million. Marel also announced the acquisition of all shares in the Danish company Scanvægt International A/S for ISK 9.9 billion. With the purchase of Scanvægt, Marel now employs 2000: 795 in Denmark, 350 in Iceland and 380 in the UK as well as in approximately 30 sales offices in 15 countries worldwide.
These were reasons enough for Viðskiptablaðið to send a reporter to Garðabær, where this international company has its headquarters, to talk with Marel CEO Hörður Arnarson.
Hörður Arnarson has been CEO of Marel since 1999, but his story with the company spans a much longer period. He has been involved in the company since 1985, just two years after it was founded, and taken part in the adventure from the start, as he worded it himself. Hörður was involved in Marel growing from a small, 20-employee company into a global leader in its field employing 2000 people in 15 countries.
Good financial statements
Hörður Arnarson said that the financial statements were well received within Marel, since it showed the company’s performance was back on track after some difficult quarters. The strong exchange rate of the króna last year caused serious problems for the external operating environment of export companies such as Marel.
“We now see clear signs of a turnaround and a strong increase in revenue. In addition, the operating profit (EBIT) has never been higher in any single quarter,” says Hörður. “It is very important for the company’s external operating conditions that the króna’s exchange rate has declined and is approaching its equilibrium value.” According to Hörður, 98 - 99% of revenue is earned abroad, and domestic costs are of course greatly impacted by the króna’s exchange rate fluctuating as much as it has.
Hörður says that the impact of a more favorable exchange-rate trend will be seen more clearly when results for the second half of the year are published. Forward short-term exchange rate contracts had already been made for the second quarter when the króna began weakening, and their impact is yet to be fully felt. According to Hörður, it is necessary to negotiate such contracts to fix domestic costs and ensure against exchange-rate fluctuations. “An unstable exchange rate for the króna creates very precarious conditions for Icelandic export companies. It can actually be said that those who run such companies in Iceland practice risky currency speculation alongside managing their companies. This is a reality that companies in Europe do not have to deal with,” says Hörður. In his opinion, this is a completely unacceptable situation for companies in Iceland, regardless of their field of operation.
The year of acquisitions
On Monday 7 August, Marel announced the purchase of all shares in Danish company Scanvægt International for ISK 9.9 billion. Earlier this year Marel purchased the British company AEW Thurne and Delford Sortaweight (AEW Delford) for ISK 1.7 billion. What impact will these acquisitions have on the Group’s overall operations, and how is their integration progressing?
“It is clear that Scanvægt International and Marel are rather similar companies, but with the purchase of AEW Delford we move further back on the value-added chain, and broaden our product mix considerably since they have various new products. For example, they are very strong in the meat sector.” According to Hörður, the purchase of Scanvægt presents great opportunities for profitable growth as the synergic impact will be widespread. In addition, new product categories will enter the mix, new market possibilities will present themselves in the dairy and vegetable industries and new markets in South America and Southern Europe will open where there are strong food markets and therefore diverse opportunities for growth.
“Scanvægt also has a stronger service network than we have had, and has made great progress in this field. We believe that we can share and learn from this experience. We have always focused on service, but Scanvægt has been operating much longer than we have and therefore have gone farther. The ratio of service in Scanvægt’s revenue is triple what we have. Also, we feel that it will be easier and more economical to develop better services for our customers when the company has reached this size. That which they can learn from us, however, involves project management and developing turnkey solutions for companies. We have excellent experience in these areas,” says Hörður.
The goal is to be among the largest on the market
Two major acquisitions this year. Are further takeovers on the horizon for Marel as a result of the company having fostered internal growth in recent years?
“Takeovers are an important component in a highly ambitious vision that we introduced at the annual general meeting last February. Marel aims at being a leader in the international market in the development and marketing of high-tech equipment, and triple its revenue over the next three to five years. Last year, the Group’s turnover was EUR 130 million. With the purchase of AEW Delford and Scanvægt, turnover will double to EUR 270 million.” Hörður says it is quite possible to attain the goal of an annual turnover of EUR 350 million over the next three to five years without purchasing other companies. “We can reach the goal within the timeframe even by strictly focusing on the Group’s internal growth,” says Hörður.
On the other hand, Hörður says that they will continue to look for opportunities involving external growth. Marel’s vision of tripling revenue is based on extensive analysis carried out in cooperation with foreign consultants. “We put a lot of effort into understanding how the market we operate in is constructed and how it has developed. Then we projected how it will develop over the coming years. The conclusion was that the market for high-tech equipment in the food processing industry comprises many small companies, most of which were formed 20-40 years ago, and that eventually many of them will merge, as has been the trend in other industrial sectors. Eventually this will lead to two to three large companies with approximately a 15-20% market share, and others with smaller shares. When we received these results, the largest companies on the market had about an 8-9% market share, and Marel’s share was 4%. At that point we decided to aim to make Marel one of the leading companies,” says Hörður. After the acquisition of Scanvægt, the Marel Group has a 9% market share.
Hörður continues. “Afterwards, we analyzed about 130 companies on this market, and created a list of eight companies that we believed would provide Marel with the largest gain if joined. The two companies we purchased this year are on that list. This analysis work took several years, but it has enabled us to systematically carry out our strategy for developing the company.
“We are certainly not randomly buying companies. We have carefully studied the market and evaluated the benefits of what we feel would be advantageous to purchase. We are not looking for inexpensive companies to buy, own for a short time and then sell at a high price. Our focus is on building up the company with external and internal growth to attain the goal of being at the forefront of this market, and of fulfilling our vision. We are growing to meet market demands.
According to Hörður, many felt that the company’s announcement of tripling revenues over the next years was evidence of audacious optimism, but it is now apparent that the goal will probably be reached sooner than planed.
The international food processing market
You have put a lot of work into analyzing this market. Why haven’t there been more mergers than those to date?
“The reason is that most companies in this business were founded from 1965 – 85 when new technology incorporating electric motors and mechanical parts were developed. Later, electronics and software were added. Scanvægt implemented this technology early on and Marel much later. Most companies in this new industrial sector were founded by young entrepreneurs 30 to 40 years ago, but they are now approaching retirement age and a new generation is ahead. There is often no one to take over operations, which initiates the merging process,” says Hörður. According to Hörður, there was just such a crossroads at Scanvægt. Company owner Lars Grundtvig, who has reached the age of 64, faced the prospect of retiring after having built up a dynamic company. However, neither of his sons was interested in taking over, so a change in ownership was in the cards.
Hörður says that the acquisition of Scanvægt was discussed extensively in the Danish media, and the reaction everywhere has been positive. He was not surprised by the response since Marel has good experience of acquisitions in Denmark. In 1997, Marel bought the Danish company Carnitech, which was then larger than Marel. Since then Carnitech has quadrupled its turnover and built a new factory in Denmark. “We were judged by this positive experience and are not aware of any distrustfulness or negative coverage,” says Hörður.
What is the most difficult aspect of working in the global food industry? Don’t you have to keep an eye on everything?
“There is always some crisis going on somewhere. That is why it is necessary to be on many markets, and not put all one’s eggs in one basket. If consumption declines in poultry out of fear of the avian flu, fish consumption increases, and so on. What makes this business enjoyable is that our customers are continually looking for ways to improve their products. They want increased capacity and improved utilization. We therefore need vigorous product development in order to meet these demands, which is exactly what makes this a dynamic and enjoyable environment for technology companies,” says Hörður.
Isn’t there considerable competition from Asia and other places where high-tech companies, and even knockoffs, are common, and where companies enjoy lower costs than are common in Europe and the USA?
“When talking about equipment based on highly advanced technology in the field of electronics and software, then there is not much imitation,” says Hörður. He says that the enormous specialized knowledge required, and the complex process involved in product development, make it very difficult to imitate this technology. Companies in Asia have chiefly been imitating appearance and equipment that is simpler. In addition, patents prohibit and impede such activities. “It is to our advantage that it is necessary to be able to offer an extensive product mix to meet the needs of high-tech food processing companies. It is not enough to offer one machine; companies must be able to provide total solutions,” says Hörður. Marel has specialized in such products and solutions for many years.
Marel is now a leader in the production of high-tech equipment for food processors in many sectors (fish, poultry and meat). You provide total solutions for most of the largest companies in these sectors. Product development and new technologies must play an enormously important part in your operations. How much investment goes into research and product development?
“We have a very vigorous product-development program, and the companies within the Marel Group earmark about 6% of turnover for product development. It is the company’s policy to continue along these lines. This means that we put about ISK 1.5 billion into product development annually.” According to Hörður, the aim is to maintain this ratio and use new capital better to bring more products faster into the marketplace. “There is no other company in our market that puts a similar amount into product development. We place major emphasis on this aspect of operations, as it is the reason for our success on the market today,” says Hörður.
Marel headquarters are and will continue to be in Iceland
Marel is an international company with operations in 30 countries around the globe. Its headquarters are in Garðabær, Iceland. Hörður says that despite the difficult external conditions at home and instability in the economy, they have never considered moving operational headquarters from Iceland. “Instability in the economy has naturally slowed the company’s growth, but we have nevertheless grown rapidly. For example, we are expanding our factory in Iceland, and the new expansion will go on line in September. About 20% of all production takes place in Garðabær, mostly production of new products,” says Hörður.
According to Hörður, marketing and product development management is located in Iceland. He added that Marel has no plans to list the company abroad. “The Icelandic market has been beneficial for us, and we feel that the company is still that small that we would not receive the same advantages on a foreign market as we have here. The Icelandic capital markets have made our growth possible, for example we financed our acquisitions in recent months by issuing debentures earlier this year. It is quite clear that the participation of Icelandic pension funds and principal investors in our offering has supported our push forward. I believe that a company the size of Marel would not enjoy better conditions in relation to the capita markets as here in Iceland,” says Hörður.
Hörður emphasizes, however, that the company’s future growth will mostly occur abroad. “We will continue to emphasize internal growth. Over the past 10 years we have been growing about 20% yearly, and the goal is to continue this trend with strong product development and marketing. External growth is also on the agenda in accordance with our goals and vision,” concludes Hörður.
Translated and published with the consent of Viðskiptablaðið, a weekly business newspaper in Iceland (www.vidskiptabladid.is/)
Photos: Arnaldur Halldórsson