Tomra Systems ASA (TOM) Earnings Call Transcript & Summary

Good morning from Asker, Norway, and welcome to our quarterly results presentation. My name is Georgiana Radulescu, and I'm Head of Investor Relations. With me today, I have Tove Andersen, CEO; and Eva Sagemo, CFO, who will take you through the results. [Operator Instructions] With those being said, I will give the word to Tove.

Thank you, Georgiana, and welcome all to our fourth quarter 2022 presentation. Today, we present the 10th consecutive quarter with organic top line growth and the third consecutive quarter with all-time revenues -- all-time high revenues. Our revenues ended on NOK 3.477 million, that is up 7% the currency adjusted versus 2021. We actually had a record high revenues in all divisions this quarter. Collection ended up on 6%, Recycling 4% and Food up 9%. Our gross margin for the quarter was 42.4%, that is 1.2% below same quarter 2021. But it shows also a positive trend versus third quarter this year. So it's up 1.2 percentage points versus third quarter this year. As we have previously communicated, we have had the pressure on our gross margins during 2022 due to delays in price increases versus cost increases. On the operating expenses, we ended on NOK 979 million, up from NOK 794 million the same quarter 2021. At Capital Markets Day last year, we presented the updated strategy where we show that we have ambitious targets, both on increasing revenue and improving our profitability, and we are investing in our business and operations in order to meet these targets. This gave then an EBITA of NOK 496 million, down from NOK 535 million last year. Cash flow from operations ended up on NOK 350 million. The main reasons behind the reduced cash flow in the quarter for this year versus last year is linked to working capital. We had a very high activity level in the quarter and also especially at the end of fourth quarter, and that is the main reason for increases then in accounts payable and accounts receivable. Our order intake in the quarter was NOK 1.5 billion combined for Food and Recycling. This is up 17% versus the same quarter in 2021, especially good performance in Recycling in the quarter, and there's also some positive currency effects in there. This gave us a healthy order backlog end of last year over a bit more than NOK 2 billion. And this is then up 17% of where we started 2022 and position us very well for further growth in 2023. As previously commented upon, our cost inflation has continued to be a pressure point, especially in collection where we have communicated previously that due to frame agreements, there is a time lag. It will take some time before we are back at normalized levels. However, this has continued focus from the organization. And in addition to price increases, we have cost reduction initiatives that are running in all 3 divisions. On dividend, the Board proposes an ordinary dividend of NOK 1.8 per share, that is an up 9% versus the ordinary dividend that we gave out in 2021 and is in line with our dividend policy. Then let's move over to business update, and we'll start with Collection. As I already mentioned, collection had an all-time high quarterly revenues in the quarter of almost NOK 1.7 billion. The key contributor to that was increased sales into Romania and the Netherlands. In Romania, the retailers are preparing for the deposit scheme that will go live in November 2023. And as previously communicated, second half of 2022, we had sales of approximately NOK 150 million. In the Netherlands, the retailers are preparing for the can deposit extension, which from the law was then approved from first of January this year, but that we expect to be operational in April this year. We had approximately NOK 100 million in sales Q4 for the Netherlands. Another highlight in the quarter was that we signed a letter of intent with the MOL Group, who has been appointed the waste concessioner in Hungary for their upcoming deposit scheme in Hungary. So that will take effect from beginning 2024 and our letter of intent covers that supply of approximately 2,000 to 2,500 machines into Hungary. The pictures you see here are pictures of what we will launch at the EuroShop, which will start this weekend and will take place this week and the next week. EuroShop is a big international retail trade fair that takes place in Berlin. And what we will showcase there is really future versions of some of our machines. And I think you can see from the pictures here that this looks quite different from the typical reversing vending machines we have had in the past, and I'm very excited to see the reaction of what we're launching there. Some of the things that we're launching, lower left here, you will see the new version of our multi-feed machine. Up right, you will see a new backroom solution where we are utilizing the height of the space in the refillers to save floor space. We will also there showcase new digital applications and service concepts. Innovation is key for us. It is key for delivering on the growth, but also to maintain market share and to maintain the margin level, and we have really stepped up in this area the last period. On the right-hand side, you will see the updated list on countries that have a firm decision on going ahead with the deposit return scheme. There are not any big updates on that versus previous quarters. I will not go through it in detail. But if you look at all the ones, except Austria on this list, will go live then either 2023 or early 2024. Let's then move into Recycling. Recycling had a very good quarter in Q4 2022 with all-time high revenue and all-time high order intake. And as shown on the graph here, the order intake were up 23% versus last year. We have seen good demand from all regions and all segments that we are operating in. And then also, if you look at the whole year of 2022, it has been a really good year for our Recycling division. The division has delivered a growth of 26% in 2022. And also, we have delivered a solid order backlog of NOK 965 million, which is up 37% compared to where we ended last year. And I'm very happy with the performance of the Recycling divisions. These things doesn't happen by itself. It takes a lot of effort to actually grow at these paces. We do believe going forward that we'll go back to a bit more normalized demand levels. We see that the commodity prices have been reduced somewhat and also, as illustrated here, with the PET prices going down. However, it's good to see still a significant margin on recycled PET versus virgin PET. However, this doesn't change the underlying drivers and the underlying drivers in the Recycling division. It is increased demand for recycle content due to increased focus on sustainability, and it is legislative pressure. And that will continue to drive the demand going forward in this segment. Then over to the Food business. Food delivered a strong quarter, Q4 2022, with a growth of 9% currency adjusted and also increased margins, mainly due to volume product and customer mix. As shown here, our order take in the quarter was up 14% compared to Q4 2021. We had a good order performance in processed food. So processed food was especially good in the quarter. While on fresh food, the order intake was below last quarter same year mainly due to bad harvest of certain categories, certain fresh food categories. Overall, the market sentiment in Food is good for processed food, but we do see some sign of weaknesses for the Fresh Foods segment. As we are presenting in Q4, it's a good time to reflect a bit on 2022. And I wanted to give you some highlights on the progress that we have made in the transformation of our Food business, focusing on portfolio, market and expertise. On the portfolio side, as many of you know, our Food business is the result of 4 major acquisitions. And with 4 major acquisitions, you also then acquire a legacy portfolio. What we have focused on in 2022, is really to consolidate that portfolio, streamline it and also align our innovation road maps and improve our life cycle management. This is progressing well, but these products have typically life expectancy of more than 10 years, so this is a work that -- to be fully implemented will take some time. Another thing we have done on the portfolio is to do co-development of integrated solutions. And one example of that is our cooperation with Marel, where we have launched Spectra, which is for the poultry segment, in-line inspections of poultry, that can then be sold as a part of the Marel solution for that segment. On the Market side, part of our strategy is to grow in certain regions by leveraging the competence from other regions, which has been progressing in 2022. Last quarter, we talked about ICOEL, which is the partner -- one of the partners that we have chosen to meet the demand for integrated solutions by selected and certain customer segments. Another thing we are doing, where we are in the middle of doing it now is that we are changing our go-to-market approach in fresh food for Europe and Latin America. So what we are doing there is that we're changing from going through a distributor to our self go-direct to customers, both for sales and service. And we believe that is a significant or an important enabler for drive further growth. On the Expertise side, we have done many different things in 2022, but to mention a couple of things. Category management is key in Food. We have gone from being a more traditional sales force focusing on equipment to really be a customer-centric sales force. And in Food, that means that you focus on the categories that you're applying into. So we have strengthened our category management and competence, but also we have worked on streamlining our customer-centric back-office business processes. Again, we come from 4 different companies, and we have been working now on streamlining those to increase revenue, increased sales, increased customer satisfaction, but also increased service. And one concrete thing we have done there is just before Christmas, we launched our new CRM system, Customer Relation Management system in the Food division. So overall, we are seeing good progress in the transformation of Food in 2022, and we are then progressing in line with our strategy plan. But as we presented at the Capital Markets Day, our strategy is not only about accelerating growth in core but it's also about developing adjacent opportunities. So also, I want to say a few words around adjacent opportunities. But first, I then wanted to recap what is this really about. So developing adjacent opportunities is about taking our 50 years of experience, the technology know-how we have, the relationships we have in the value chain to then develop new significant business opportunities that can become a fourth or fifth leg of TOMRA. They all need to be right for scaling. So it's not about R&D., it's really about building businesses. And they all need to be under the heading of leading the resource revolution. Today, we have 3 of these initiatives running. We have one on closing the loop on textiles, we have one on developing reuse concepts for takeaway, and we have one which is the plastic feedstock initiative. And on the plastic feedstock initiative, we then launched or approved and communicated a new significant investment into that initiative. So what we communicated is that we will build an advanced sorting plant to then enable closing the loop on plastic. What does this practically mean? It means that we will buy mixed plastic fractions from material recovery facilities. This is household waste, mixed plastic, dirty plastic. We will apply high technology, best-in-class sorting and washing to really turn it into 10 high-quality polymers that we will sell to the recyclers. The investment will be approximately EUR 50 million to EUR 60 million. It should be operational by '24 to '25 located in Germany with a capacity of 80,000 tons. But the question might be then why is TOMRA doing this? And the reason why we are doing this, it is because there is a significant business opportunity here where we have the right to win. If you look at today, the future demand for plastics, especially kind of hard to get plastic that is not being recycled today, if you look at the legislation, there is a significant gap in the market. The demand is there. And if you look at what is currently happening with plastic, you have 24 million tons of plastic going into incineration, [ 40 million ] tons going on landfill in Europe. So you have the raw material. But to actually convert that raw material until a high-value plastic that can be recycled. But the key thing to unlock that is the sorting capability, and that is what TOMRA is good at. So we believe that this represents a good business opportunity for TOMRA where we, with our competence and knowledge, can really unlock a new circular loop within plastics recycling. So we are very excited about this investment. With that, I will then hand over to Eva, who will present the financials and outlook.

Thank you for that, Tove. So starting with the group P&L for the quarter. As Tove said, we have all-time high revenues, up 7% currency adjusted compared to the same quarter last year. All business divisions delivered a strong Q4 top line: Collection up 6%; Recycling up 4%; and Food strong, up 9% currency adjusted for the quarter. Gross margins ended at 42%, which is 1.2 percentage points down compared to same quarter last year. And as Tove mentioned, inflation is still impacting the margin negative. But also this quarter, we have had positive impact coming from volume and mix, especially then in Food. Looking at the gross margin, we have no major impact coming from currency, less than 0.5 percentage points for the group in the quarter. OpEx, operating expenses, is up 18% currency adjusted for the quarter. And we are investing, as Tove mentioned, in the start in business growth in Recycling, but also ramping up in collection for new market, and then the business transformation project in Food. The OpEx run rate of our revenue is at 28% for the quarter. EBITA ended at NOK 496 million, which leaves an EBITA percentage at 14% for the quarter. Quickly on the full year, we are up 8% currency adjusted, ending at NOK 12,188 million for the year and then with EBITA at NOK 1,625 million leaving EBITA margin at 13.3%. Collection. We had record high revenues in the quarter, up 6% with also high comparables from last year. The Nordic countries continued to perform good. We had stable existing markets in Europe, but we had revenues from Romania at approximately NOK 150 million for the second half year -- second half of the year. And then in the Netherlands, we're ramping up for the can implementation, we had approximately NOK 100 million coming from that country in the quarter. Looking at the margin -- gross contribution margin, we were at 37%, which is 2.5 percentage points down compared to same quarter last year. And most of that is a result of the lagging price increases due to these long-term frame agreements in Collection, and the rest is coming from unfavorable mix this quarter. In Collection, we have very limited currency impact on the gross margin. Operating expenses is up 8% currency adjusted. And looking at the full year, we are up 6% on OpEx compared to an increase in revenues of 4% for the full year. So we are continuing to investing in ramp up in new markets, which explains the extra increase in the operating expenses for the year. EBITA ended at NOK 246 million, which is -- which gives us an EBITA at 15%. Then looking at Recycling, all-time high revenue also here, up 4% currency adjusted and also high comparables from same quarter last year. And this quarter, Americas, were especially strong, up 54% compared to same quarter last year. Gross contribution margin at 51%, which is down 3 percentage points compared to same quarter last year, mainly explained by inflation, but also some related to mix effect. Operating expenses is up 24% this quarter compared to same quarter last year. But looking at the full year, we ended at 20% increase in OpEx with a revenue growth of 26%. So OpEx is growing in line or less as revenue growth. EBITA at NOK 141 million with an EBITA margin of 21%. Then looking at the order side, the order intake. We had an order intake growth of 23% for the quarter compared to same quarter last year. Currency adjusted, we were up 18%. That leaves us a strong order backlog, up 37% year-over-year. The currency adjusted, up 32%. So our order backlog ended at NOK 965 million in Recycling. And our estimate, which is not the guiding with an estimate going into the next quarter, so Q1 '23, we estimate a conversion ratio of that backlog at 65%. Then Food. We also here had all-time high revenues, up 9%. So strong performance, both in Europe but also in Americas. Europe were up 82% and Americas were up 33%. We have some setbacks in Asia or that region, APAC region, due to bad weather condition in previous quarters, but also this quarter, as Tove mentioned. The margin -- gross margin ended at 45%, which is up 2.5 percentage points compared to same quarter last year. And as I said, we have a good positive impact coming from volume and mix but also some from currency at 0.5 percentage points on currency. The operating expenses in Food is -- has grown 26% this quarter. And if you look at it for the full year, we are up 12% on our revenue growth at 5%. And the high run rate in operating expenses in Food is related to: one is the business expansion, and then we have the transformation project, which Tove talked about; and then we also are coming more back to normalized activity levels after COVID. And as you know, the APAC region has been for -- has had a longer lockdown than the rest of the world, especially Europe and Americas. EBITA ended at NOK 157 million, which leaves us an EBITA margin at 14%. Then looking at the order picture for Food, order intake at 14% growth compared to same quarter last year. Currency adjusted, we are up 4%. On the backlog, we ended at NOK 1,083 million, which is up 4%, but down close to 6% currency adjusted. And as Tove mentioned, we are seeing some -- processed food is very strong, while fresh food is suffering a bit from bad weather condition in parts of the world. In Food, we have estimated a conversion ratio of 60%, plus the order backlog of NOK 1,083 million for the next quarter, the first quarter 2023. Then looking at the balance sheet and cash flow. Our balance sheet has grown year-over-year, 20%. Currency adjusted, we were up by 15%. We have been allowing for higher inventory levels in 2022, and we have seen that quarter-over-quarter. So we have consciously been building up safety stock to be able to deliver to the market. And we have also planned for new machines going into new markets in -- especially in Collection. We also had a strong quarter on revenues and especially then in December, which then gives a good increase in the accounts receivable year-over-year. We have also done some investments this year to mention some is -- one thing is the throughput market in Latvia, where we took some of the investment last year, but then continued a bit into 2022 and also did this re-class between inventory and tangible assets. And we have also invested in U.S. but also in Australia, where we have set up new collection points according to our agreement in New South Wales. And then we have also increased our right-of-use assets related to buildings in existing markets. Looking at the cash flow from operations, we are at NOK 350 million in the quarter, down from same quarter last year. We are also down for the full year. And as I mentioned, it's due to the negative working capital effect where that has been increasing this year, and also that we have lower profit compared to 2021. Our equity ended at 47% and our gearing at 1.2. And as Tove mentioned in the beginning, we have then a proposal from the Board to pay out an ordinary dividend of NOK 1.80 per share which is then 52% of the EPS for the year and in line with our dividend policy. So as I said, we have been consciously allowing for higher working capital level this year, but we are targeting lower levels going into 2023. We have utilized our strong balance sheet to be able to deliver to the market to prepare for new markets, but also to continue to invest in future business. And at TOMRA, we believe it is important to keep good capital discipline as we will continue to invest in R&D, future business opportunities and allowing for dividends also in years to come. On the financial position, our weighted average debt maturity at 3.1 years end of the year, and we have also unused credit lines of more than NOK 1 billion. We also have senior unsecured bonds of NOK 1.6 billion listed at Oslo Stock Exchange, where we have green bonds of a portion of NOK 1 billion. Just to summarize on the currency. As you can see from the graph, we have a USD/NOK, which is up 16.8% for the quarter. And EUR/NOK, which is up 4.2% for the quarter. And these effects give positive effects on TOMRA's performance, as mentioned. The P&L is up 7% on the revenues. We have a slightly positive impact on the gross margin. And the EBITA margin for the quarter at 0.5% or even less than 0.5%. And then for the full year, our revenue is at 4% positive effect from currency and gross margin at 0.5% and EBITA close to 1 percentage point for the full year. And we will continue to be exposed to currency as most of our transactions, both in our P&L, but also in our balance sheet is in euro and U.S. dollar and Australian dollar. Then looking at the outlook, starting with Collection. We expect high activity related to preparation for new markets. And to mention some, we are in the middle of the expansion for the Netherlands for can implementation. And we expect that to continue into Q1 at more or less the same levels as we have seen in this fourth quarter. Scotland is going live in August this year. We have Romania commencing in November and then Hungary in January 2024. And then to mention some others that will also go live soon is Ireland in the February '24. And then we have Quebec and the remaining states in Australia that will come during the fall. But of course, the quarterly performance will depend upon the timing of these new markets. And as we have said before, it's the different markets that operate differently, so that can vary in the pace for the different markets preparation. Then moving on to -- and then, yes, maybe I can mention also on the gross margin on Collection because that has been quite a pressure point this year. We expect also the gross margin to gradually improve throughout the year going into 2024. And then when it comes to ramp-up for new markets, we have a run rate for 2022 at approximately NOK 200 million. And we expect that level to continue at the same -- at the NOK 200 million, but we'll come back with more information if that will change. Then moving on to recycling. The pipeline in recycling looks promising, and the positive momentum is assumed to continue but to normalize towards more from the high levels that we have seen now in 2022. The demand for recycled material is expected to create opportunities and the circle economy is still an important driver in this business, in addition to also commodity prices. But we see that legislation, the industry and also customer expectation is driving the need for recycled materials. Then looking into Food. Short term, we see the demand in Food as more stable. But again, without a doubt, the need for automization creates opportunities, mid- and long term. And to mention some is high labor cost, but also food safety that we have to have more available to produce, but also taking care of food waste in production. And then on the cost side, so cost inflation will continue to be a pressure point, but we are taking pricing actions and cost measure, and we expect that to mitigate the supply chain and inflation effect going forward. We don't expect the cost to increase, but we don't necessarily see any significant drop currently, except for the elevated freight cost that is expected to move towards more normalized levels, and we see that already. Then when it comes to the bottlenecks that we have had in sourcing shortages and also on the logistical side, we expect that to also ease up. And we don't expect to buy in the spot significantly values in 2023. And then the last thing, which is important is on the currency. And as I mentioned, we are exposed, especially to euro and dollar, U.S. dollar, and that will have an impact going forward as well in future quarters. And with that, we can start the Q&A session.

Thank you Eva. And first of all apologies, everyone, if you have experienced interruptions in the webcast, the recording will be uploaded on our website shortly after the sending. We have a few questions that have come in. The first one is from Elliott at Nordea. Can you comment further on the gross EBITA margins? Do you expect Q4 to be the low point? Or do you think these levels could continue throughout the first half of 2023.

Yes. So we ended the year at 13.3 in the last quarter, fourth quarter at 14.3. And with the good momentum in collection, the cost measures that we are taking to control costs, but also taking the price increases into consideration and good momentum in the Recycling, we expect to be able to lift the margins going forward, but can't promise anything in Q1 this year already.

Thank you, Eva. The next question is from [ Markus Heiberg at SEB ]. Can you please provide a flavor of how sensitive economics of the sorting plant will be to virgin and waste material? What price levels will you require?

Yes. So I assume this is linked to our feedstock initiative and investment in the feedstock plant. So this is a bit of an unchartered territory because what we will do here is that we will buy something that is seen as a waste today, and we will sell into qualities that there is not an existing commodity market for currently. We have been in dialogue both on the supply side and the -- both on the sourcing side and on the customer side, and we feel that there is both a good availability of raw materials into the plant, but also we see a significant interest and demand from customers to purchase the material that we are getting out. So we are comfortable with the discussions that we have had that, that will create a good profitability for this business.

Thank you. The next question is from Elliott at Nordea. Could you provide some detail on how much of the OpEx is related to circular economy, future-oriented costs?

Yes. So in this year, as also as previous years, we have -- we invest approximately 8% to 10% of the revenue into future-oriented costs. And we don't necessarily break it into the different buckets. But what we communicate is that we have the ramp-up cost in Collection, at NOK 200 million, and then we have an R&D investment, our costs at levels between, yes, 4% to 5% of the revenues, and then the rest is within other future-oriented activities in TOMRA.

Do you expect the U.K. opportunity to provide any revenues at all in 2023? Also from Elliott from Nordea.

Yes. So if you look at the U.K., so as we have shown in the presentation, Scotland will go live with the deposit scheme in August. So we do expect impact from sales into Scotland this year. If you look at the rest of the U.K. -- if you look at the rest of the U.K., U.K. just communicated the result of their consultation with an indication of go live late 2025 with deposit scheme. So for the rest of the U.K., I don't expect a significant impact on sales in 2023. However, the Republic of Ireland is going live in February 2024, and we expect the impact on sales into Republic of Ireland this year.

Thank you. The next question is from Daniel Haugland at ABG. You say the gross margin is expected to gradually improve throughout the year and into 2024. What kind of levels are you targeting to get back to in 2024? Historically, it has been at 40% to 42%.

Yes, it is uncertain because we need to also succeed on levering -- so increasing our prices and also taking the cost and also have a success on the cost initiatives that we are running in TOMRA. So I'm not -- I don't want to go into details what we expect for the -- for this year and then going into 2024, but we are optimistic in order to increase the gross margin in -- towards the end of this year. And then we need to remember that we have this long-term ambition of having EBITA level at 18%. So we still have some years to deliver on that profit target.

Thank you. And with that, we have no further questions. So thank you, everyone, for listening in, and see you next time.