Tomra Systems ASA

OSE:TOM

Earnings Call Transcript 2021-Q1

[Stefan Ranstrand, President & CEO]

Ladies and gentlemen, good morning, and welcome to the First Quarter Presentation of 2021 for the TOMRA Group. My name is Stefan Ranstrand. I am the CEO of the group. I'm here today with Espen Gundersen, our CFO; and Georgiana Radulescu, our Head of IR. It's an exciting quarter, which we're happy to report to you. We are still in the pandemic, and we see effects of the pandemic in the quarter. And the highlights are that we are reporting very strong performance in Collection, weaker revenue in Recycling Mining, flat revenue in Food. And all in all, that leads to the group revenue growth with 3%. We have stable gross margins in the quarter, slightly up in Collection and down in Recycling Mining. We have good cost control. And in consequence, the earnings increased to NOK 240 million, which is 17% adjusted for currencies, so 17% up. An all-time high order intake that is important, especially in the Sorting business. We ended at close to NOK 1.4 billion in order intake, which represents 24% increase in Food and 6% in Recycling Mining. And here, we are comparing pre-COVID times, so fairly on a normal business level comparison. That means also, in effect, that the all-time high order intake also now results in an all-time high order backlog, which is up 14% and ending at close to NOK 2 billion. COVID-19 is affecting us. We have had slower order intake last year, which we now see in the first quarter revenues. We have had challenges, especially to serve customers and maintain the revenues in service. But in all, TOMRA has been able to navigate through fairly well. And as we can see from the reverse vending business, so the Collection Solutions, we're actually doing very well there. And one of the reasons that we are navigating through so well is that we are in critical or essential businesses, both in terms of the retail sector, in the food sector and the recycling sector. And I think we have also been able to navigate through well, thanks to our strong team -- crew, our culture and our footprint. We do see some challenges on the supply and logistics, and Espen will talk a little bit more about that later. So it's not business as usual. So we still have to be cautious. But that's, in summary, to where we ended up in the quarter. Let me then talk a little bit more into Collection Solutions. As I said, a strong quarter with strong growth in revenues, up 35% in the European markets, driven strongly by the expansion in Netherlands, also good activity level in Germany and in Northern Europe. North America was a rather stable business. And we had growth in Australia, but nothing significant to talk about there. As you know, the European Union has launched a single-use plastic directive and there is quite a lot of activities on counter level in regard of planning for how to collect more volumes, and we see a lot of countries are taking the path of DRS or deposit return systems. And in that regard, Latvia is worth mentioning here in this report. They have a tender process out. TOMRA was elected -- or selected as the supplier for that system. So we are now entering the negotiation phase with a system operator in Latvia. So that's really exciting. And that system is estimated to go live 1st of February 2022. So the timing is right here. And as we have reported before, Netherlands, they decided to go live with an expansion of the system, which already existed 1st of July this year. That system includes now small bottles of PET and that's one of the -- that's the main reason why we see the drive -- the strong increase in volumes in The Netherlands. Later, in end of '22, they will also embark on expanding the system again, and in this time, including cans. So that's, for the moment, not part of the system. Other new deposit markets. Slovakia is set up for coming in, in January 2022. We have Scotland, July 2022. And now also Victoria has announced the introduction of a deposit system, so another state in -- on the Australian continent that goes the path of deposit. We are very happy about that. They have also communicated a model they will apply. It is a model, which we call split responsibility. It's very similar to the system we have successfully operated now for some years in New South Wales. So we are really very excited about this opportunity for a better environment and a better economy. So in short, that is the high-level situation in Collection. Again, I repeat, a strong quarter with solid revenues growth. Going over to Recycling and Mining. And obviously, this business has had quite a rocky situation, if I may say so. So revenues were down significantly. And this comes due to 2 factors: one, slower order intake in the third and fourth quarter last year; and then also that we've had some delays in shipment, actually not caused by us, but that the customers have been late in being ready with their projects, new plants. And this also, again, is a pandemic effect that a lot of supplies cannot come in time, people cannot travel there for installations for start-ups, et cetera. And we also have seen over the last years that the tendencies that we have larger projects, and of course, the larger and more complex the projects are, the more they are complicated to execute during times of a pandemic. So the pandemic is affecting us and also, in this case, on the service side. But very nice is to experience that we have a strong increase in order intake. And 6% up might not sound very much, but we are here really measuring on a very strong first quarter last year. So we are, in fact, very pleased with this. We are also, with that having an all-time high order backlog, so -- which gives good food for future revenues. We are active in different sectors, as you know, very robust. We have experienced the waste and recycling of plastic, especially our PET sector. Good momentum last year and continued good momentum now. But now we have also seen that the metals and mining sectors are also picking up. So we have had positive order intake in this sector. We see increased strength in commodity prices, which are actually critical for our customers here. And we have, in this period also, with excitement, launched our new small diamond sorter called XRT 300. I will talk a little bit more about that in short. On the upper right hand of this page, you can see the commodity prices. You can especially see the dark blue line, which is virgin material. The volatility has been quite high. And now you can see since end of '20, we really see a steep increase. There's a bit slower development on the rPET. We see that's more stable, so less volatility on the recycled PET and that probably comes due to a lot of supply agreements, giving more solidity into that business model for our customers. So all in all, this is -- are now good drivers for an expansion in the market for our sorters. The launch of the XRT 300 is very exciting. As you know, since we launched a few years back, the diamond sorters for big diamonds, we have been able to recover 80% of all big diamonds in the market. So we really made a transformation in the industry and could safeguard these big diamonds from being destroyed through crushers. Now that is very established. But the market opportunity for big diamonds is not very big. The big volumes are in the small diamonds. So we have been working intensely on being able to use the same principle of technology, but going down on the object size. So now we are down at 0.4 to 0.6 millimeters, smaller size of the objects, where we have rocks, which contains diamonds and you really want to rescue them. And the point here is really that in the diamond business, not one rock might be lost. So it's really high precision we are talking about here from the sensors and high-quality sort, that's what they are looking for. And we have now got this product tested and it's being installed as we speak, and we've got a number of orders. So we look forward to this with excitement and hope to be able to report more once we have proven the technology in the field with more installations. With that, I take the liberty over to Food. As I mentioned, good growth in order intake, 24% up quarter-on-quarter. Nice is to see that now we have growth in both sectors. So last year, you might recall, the fresh food remained strong, stable and processed food was really challenged, especially due to the hotel, restaurant, catering sectors being shut down as a result of pandemic regulations. Now it's not fully open, but the industry see that they need to go back to normal and prepare for supplies in the future. Hence, we've had a strong increment in potatoes and nuts, which are 2 important sectors for us and for other categories as well. But I just wanted to highlight these two. The fresh food sector remained strong. We have had strong -- even all-time high order intake in blueberries, cherries and kiwi. And as you know, we are also serving other categories like apples, citrus fruits and avocados. And also here, we see good momentum. Talking a little bit about nut and dried fruit, it's our second largest category in the processed food. We have a global market share of estimated 30% to 35%. And we have recently launched our new product here called 5C, which are able to see new things thanks to advanced NIR technology, which has now taken that to new levels. And we have also launched not too long ago a new channel sort of we call it, 3C. So we are really innovated in this industry with novel products, and hence, we also see now good growth in it. So market situation, our product offerings are obviously critical here. Blueberry sorting is also -- by the way, in the nut sector, the 5C. In this, we have also incorporated our new digital TOMRA Insight offering. So we are working on the digital platform and there will be more and more applications coming on board, and that's now embedded, the first applications in this 5C. And I think that's important to know that we are on this path and we see that as a very crucial path going forward for TOMRA. And in the blueberry sorting, which is big market when it comes to TOMRA's offering with a technology from the company, BBC, which we acquired some 3 years back, we have a global market share here of 50% to 60%. We have absolutely beautiful technology. And here, we have also enhanced since last year the offering with artificial intelligence, also part of our digital switch. We call that technology LUCAi, and it's been overwhelmingly well received by the market. And in fact, with that, we are able to see if the blueberries would have a tendency to, we call it, explode -- to open up after the packaging. And that's really an application, which then will be available also for other categories in the food sector. So that illustrates 2 important sectors for us and illustrate the path and journey we are starting up with innovation and especially on the digital platform. With that, I move on and want to talk a little bit about circular economy. This is a fairly new division for TOMRA. We started it last year. We are anticipating -- we are convinced that this will be a major sector, have a big impact for TOMRA in the future. And the reason we do it is that we have both collection technologies and we have sorting technologies, which are critical functions for enabling what we call a closed-loop system. And here we are in both these areas, as you know, a leading player and being able to tie them together, again, sets us apart and enables new opportunities where we can serve our customers and close the loop on plastics and other material. And if I may refer to Mr. -- Dr. Thorsten Leopold of Henkel, he is seeing that the availability of high-quality recycled plastics is one of the main challenges. And that's one of the challenges we are really trying to tackle here. You might recall from our previous quarter presentation where we talked about our new investment in a test facility in Germany, where we can produce 10,000 tons of high-quality material per year. And this is not a huge scale, but it's the first step to demonstrate to the industry you can take plastic from a waste stream, transform that into material that can be used for new applications. An example of that, you can see on the top right corner here, where we have been working now on applications together with the Styrenics Circular Solutions to develop recycled polystyrene, which is now being approved -- or we have applied for approval at the European authorization committee, where this material will then be used from recycled content and be used for yogurt packaging, as you can see on the image. So this is an example for novel applications where recycled material is being used also for food grade. Further innovative areas are textile sorting. So we have installed in Sweden, together with STADLER, a German integrator company, textile sorting applications where we are sorting whole textile objects by the fiber type. So using our technology to see what kind of material is in there and sorting them into fractions so that they can then be recycled. This, of course, is a very important technology for the vast and big clothing industry to support improved sustainability of the resources. So that's very exciting. And as you know, we are working intensely in preparing for the Scottish deposit market. And here, also we have teamed up with a company called Viridor in U.K. to really take it to the next level, not only collect the material, but to work for a circular economy solution. So our circular economy are now putting elements in place where you see that we are tying the value chain together, we are becoming a more holistic provider and we are teaming up with new partners, which we didn't work with before. So in the past, we were more a supplier of equipment, of RVMs or of sorters. And now we are becoming a business partner where we, together with our partners, are making sure that the value chain functions. And we supply our technology there, both from hardware, from digital platform point of view, and of course, we act also as a operating and know-how partner. So this is all, for us, very exciting developments and first steps for what we are planning to do in the area of circular economy. With that, I end here. Again, we -- I think it was a very exciting quarter. Very good momentum in, as I said, in Collection Solutions, but we see the [ sweep ] of the corona in Recycling and Mining, whilst Food was stable and all-time high order intake and order backlog. With that, I hand over to you, Espen, to take us through the financials.

[Espen Gundersen, Deputy CEO & CFO]

Thank you, Stefan. Yes, as always, let's start with currency. I guess this is the first time in 3 years that we have a headwind on currency. For many quarters now, we have always got additional positive effect from the weakening of the Norwegian krone. But now we have a quarter where we compare ourselves against first quarter '20, where the krone depreciated significantly. So we are now adjusting the other way, 10% on the dollar and 2% on the euros when you look at right columns in the reports in the following pages. Yes. Group figures. Stefan mentioned, we are satisfied managing to continue to grow this company in the currency-adjusted figures despite the situation around us. We are now comparing ourselves against a pre-COVID quarter and still managed to do 3% on top line. It's driven by Collection, no doubt, with 21% up, which is offsetting the reduction of 33% in Recycling Mining and Food is flattish. We managed to keep gross margins stable. And also OpEx is in line with last year, which is also pretty good knowing that we continued to absorb additional costs, for instance, in the circular economy unit, which we continue to invest in. So if you allow us to include the decimals, we have a 0.5 percentage point improvement of the EBITA margin in the quarter and end the quarter in NOK 240 million for first quarter, yes. Going to Collection. Strong performance in more or less all geographies. Northern Europe has been on a high note for several quarters now and continued this quarter, much driven by the R1, the bulk in feed machine. The biggest contributor to the growth is the rest of Europe. And of course, the Dutch expansion, which Stefan mentioned, has contributed a little more than NOK 100 million of additional revenue this quarter. In addition, Germany has had several orders and are doing very good compared to last year. North America, even down in Norwegian krone. Remember again, 10% dollar effect. So in local currencies, we are up 3%. And here, we had a few weeks at the end of first quarter last year where we started to see the negative effect from volumes going down when COVID started to hit. So the underlying is actually very stable in U.S. now. Rest of the world, for practical purpose mainly Australia, is slightly up. And despite storm and bad weather, which negatively influenced volumes in the first quarter this year. Due to leverage, due to some mixed product, we see a good margin development, 42% in the quarter, up from 40% last year. And only a small increase in operating expenses despite the significant top line growth. We continue to absorb around NOK 25 million of, say, ramp-up costs, future-related costs that we absorbed today preparing for future deposit markets, which is over and above what we usually would have in a normal situation. So bottom line, NOK 256 million, 19% EBITA margin. Recycling Mining, We indicated a conversion ratio of 60%, ended at 58%. So as expected, it was a slower quarter than same quarter last year. But despite lower volumes, we managed to almost maintain the gross margin on 50%. And despite higher circular economy cost, which is reported under this unit, we keep the operating expenses stable. But of course, bottom line is down because of lower volume, NOK 23 million was reported. If you look at the order situation on the right-hand side. We had very good momentum and good order intake in first quarter last year. Then COVID hit us, and we have had 3 quarters now with lower order intake. And you see corresponding decreasing order backlog throughout last year. Then in fourth quarter -- this quarter -- first quarter this year, we have had very good order intake. And combined with this lower conversion ratio, we end the quarter with the all-time high order backlog, NOK 732 million, up from NOK 702 million last year. And remember also that the order backlog is measured on the currency as of the end date in the quarters. And they are actually down 18% on the euros and 13% down -- 13% down on the euros and 18% on the dollars. So that's why this underlying currency-adjusted significant increase in the order backlog. Moving to Food. Also in this segment, slightly below the indication when it comes to conversion. We came in at 66% and 70% was the indication we gave. First quarter will always be the slowest quarter due to seasonality in Food. There is a winter in the Northern Hemisphere, which is -- have an impact on sales. Margins are stable. Operating expenses are down, very good cost control in Food. Consequently, still a better result this year than we have had previous first quarters in the Food division. When you look at the order situation, it's in many ways, a similar situation where you -- which we saw in the Recycling Mining business where we had a good momentum up until the COVID hit us, has been lower order intake for 3 quarters, resulting in a decreasing order backlog. But good order intake in first quarter now combined with a somewhat lower conversion ratio, again, led to an all-time high order backlog. Balance sheet. Comparing to the balance sheet 1 year ago is not that meaningful because of all the currencies effects. Probably better to look at the balance sheet end of the year, meaning 3 months ago. And we have 4% on the euro, 0 on the dollar when we measure those 2 balance sheets against each other and there's really nothing standing out as peculiar here. Slightly increase in inventory receivable, partly offset with an increase in other noninterest-bearing debt, giving a small increase in working capital. But besides that, it's very business as usual. And the cash flow also is very much in line with what you have seen in previous first quarters. NOK 269 million in order -- in the cash flow from operations compared to NOK 265 million last year. Still a strong balance sheet, 52% equity and a low gearing, 0.9 interest-bearing debt on EBITDA if you include IFRS 16. Also a solid financial position. We have NOK 1.2 billion in committed and used drawing rights and no short-term debts. Outlook, starting with Collection. Of course, going into second quarter, we will get very low comp figures because that was really the COVID quarter last year. So when you measure us, maybe it's better going back to second quarter '19, which is a more normal quarter, then you would get the same seasonality on the more business-as-usual quarter. That said, we had a good first quarter in Collection behind us. Second quarter will also be good. The Dutch raise will continue, more or less same speed in second quarter as we saw in first quarter. Germany will also continue to do pretty good. So first quarter will be okay. Going into second half, the Dutch expansion raise, the first phase of it will be over more or less. And maybe somewhat lower activity in some markets. But going into fourth quarter, we will be influenced by new markets probably where both Slovakia and Latvia could influence. This could both be ramp-up cost, but also sales when it comes to Slovakia. So a little uncertain how at least the last part of first half would look for Collection side. But first -- next quarter currently looks into coming good. Recycling Mining and in Food. We, in general, has a good momentum and we are very optimistic on the mid- and long-term opportunities. It's great to see the significant uptick in order backlog, both in TRM and Food in first quarter. But there still will be challenges with the COVID situation, getting people, getting products across borders, disruptions in the value chains when it comes to transportation, getting containers. I'll also mention components as a technology company. We are, of course, dependent upon components and semiconductors, and other components experienced some shortages out there. We feel we have the situation under control. But we are, of course, dependent upon our suppliers are living up to their obligation also. So these are the things that's out there that potentially could have a negative impact. And consequently, we also have a somewhat lower conversion ratio for both TRM and Food in the second quarter. We assume that the conversion ratio for Recycling will be 60%. It's still up from 50% last year, but it's lower-than-usual conversion ratio, meaning the percentage -- the revenues in next quarter expressed as a percentage of the order backlog in the beginning of the quarter. Same for Food, 75% conversion ratio, same as we had same quarter last year, but lower than usual. As always, this is not guiding, it's just an indication of how we think -- or when we think the order backlog we have today will be delivered. We will never send a profit warning if we do not meet those indications that I gave. So with that said, I don't want to mention the currency. We don't have control over that and a further strengthening of the Norwegian krone would have a negative impact on the reported figures for TOMRA. In the investor presentation, you'll find the currency dependencies if you wanted to look further into that. With that, I think we conclude the presentation and open up for questions from the web.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Espen. We have a number of questions that have already come in. The first one is from Mikkel from Carnegie. "Can you quantify approximately how much the Netherlands expansion contributed in the sales? Was the level higher or lower than you expected? Dwelling over market share and market size, how high is the risk that this strong quarter will cannibalize sales earlier expected for Q2?"

[Espen Gundersen, Deputy CEO & CFO]

Yes. I think I said that a little north of NOK 100 million in the quarter, and we assume it will not be very different figures for second quarter. So that's the answer.

[Georgiana Radulescu, Director of Investor Relations]

Yes. The next question is from Jørgen Bruaset from Nordea. "Can you provide some more color on the moving parts of the strong order intake for the quarter? How much of this translates to run rate momentum going forward? Or are there any one-offs we should adjust for? And also, please provide some details on the 24% currency impact on Food order intake."

[Espen Gundersen, Deputy CEO & CFO]

Okay. It is not a 24% currency impact. It is the currency-adjusted change, the 24%. This is a small deviation there. I can leave a short and a long answer, but let's go for the long one because of the currency is so important in this quarter. TOMRA is always using the so-called congruency principles, meaning that the order backlog in the beginning of the month, plus the order intake, minus the revenue is equal to the order backlog at the end of the quarter. You can think of this as a physical thing. You have a pile of orders in the beginning and then you get order intake on top. And then you take out what's taken to P&L, the revenues, what you have delivered. And you end up with a new pile, that's the order backlog at the end of the quarter, which again will be the order backlog in the beginning of the next quarter. And we want this to reconcile always. Then you come into accounting, where the order backlog in the end of the quarter has to be measured based upon the balance sheet exchange rates, it's a point in time. So we open with the opening balance with those exchange rates, the negative revenues. Revenues are, per definition, the average for the quarter. And then you have the closing balance, which should be measured on the closing balance exchange rates, meaning you have to have a residual somewhere. And this way to do it, the residual ends up in the order intake. So if you have a quarter without any order intake and any revenue, just to illustrate this, but the currency is fluctuating, then you will see that the order backlog is, in Norwegian krone, changing in value and that change will end up as order intake. So when you have a weaker Norwegian krone, you will get a higher order backlog measured in Norwegian krone and this will come in as an order intake and the other way around. So this was what happened both back in -- particularly back in first quarter last year, where we had a significant depreciation of the Norwegian krone. So we got an additional effect on the order intake just due to the currencies, and that's also illustrated because it was so big in the graph you see on the relevant slides. And now in this quarter, we have a somewhat negative effect because of the 10% depreciation of the dollar version, which I mentioned. So we get a negative effect on the order intake because of the lower order backlog. Maybe I hope it was clarifying, maybe complicating, but please contact me if you want me to elaborate further upon this. But that's the way the math is working. And we don't have any Norwegian krone orders or revenues worth mentioning. So everything is current in this respect. So that was the technical answer on the last part of the question. So may I -- Stefan, you can take more on the intake and the momentum around that.

[Stefan Ranstrand, President & CEO]

Yes. Thank you, Espen. And so try to make a very straight answer. So the question was then, did we have any unique or big events in the quarter leading to the growth in order intake. And yes, it's not a 100% clear question, but in essence, no. There has been good momentum in the potato sector, and of course, they go a little bit in cycles. So that we have to be aware of. It's not that every year will grow. So we have had these kind of periods. But it's not been extraordinary in this quarter. So nothing big there. In the Recycling side, in the Mining side, of course, Mining, we are driven by a few big orders. So they might not repeat every quarter. It's a small business. But in general, on the Recycling side, very stable and we see the pipeline actually increasing all the time here. So we actually see an increased momentum in the market side for Recycling as we speak. So I can answer that we see that pretty much as a normal quarter when it comes to the projects and no big one-offs in here.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Stefan. The next 2 questions are about polymer prices coming from Picard Angst, Lorena and Elad. The first is, "Do higher polymer prices and lower polymer supply fuel demand for your Recycling and Sorting Solutions?" And the second, "Polymer prices are increasing significantly. How do you see this affecting your business going forward?"

[Stefan Ranstrand, President & CEO]

Right. And I think I can take that one. So you have to think about how the world for our customers the recycle looks. If that's in polymer or in metals, it's actually the same principle. They acquire material from waste companies from other sources that is of low quality. They have a cost if they pay for it, but at least it's a cost to get it into their backyard. Then they process this material and upgrade it to a higher quality level. So making it pure. Instead of mixed plastics or mixed metals, making clear fractions of copper, of iron, of aluminum fractions or of the plastic like PET, PP, PS and PE. So the principles that are really taking from low quality and making that up to a higher quality. Once you have this high quality, that becomes tradable. So on the inside, there you have a -- you have absorbed the cost to get the material and then your revenue is depending, of course, of the commodity price -- the market price for the material. If that market price goes down, you have a challenge because you have had a certain cost, both through acquiring the material for processing it and you might come out with a lower revenue and earnings as the commodity prices have gone down. When we see, however, the material is going up again, we see that as a positive. So increasing price is positive for our customers -- increasing commodity price is positive for our customers. And hence, also their readiness and willingness and affordability for them is higher. So that's positive in itself. Further to this, the pricing is a result of supply/demand. So there is a big demand -- a bigger demand for plastics, partly driven by higher economic activity levels. But when it comes to recycled plastics, it's also driven by the sustainability wave where companies now want to have sustainable packaging and want to live up to their promises on that side. And that we have seen for years on the rPET side where there is an established market for that. So here, really, we can see -- under a longer period of time, we can see a delta between rPET and virgin material that can go as high as 50%, 60%. Right now, it's very narrow. But on the average, we see this increase. And we anticipate as other plastic fractions will also come into the category of good quality recyclables, then we will also see this here. So I hope this gives an answer to the question.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Stefan. The next 2 questions are from Kristian Spetalen from Arctic. "Congratulations on the strong figures, especially in Collections, but also the very strong order intake in Sorting." There are 2 questions. So the first one, on the former, Collection. "Could you please elaborate on the general momentum in Europe, excluding the Netherlands, which we also saw in Q4? My guess is that it is a service flush given the higher gross margin and that U.S. operations are reportedly stable."

[Espen Gundersen, Deputy CEO & CFO]

Yes. You're correct that it's higher activity in that region. It's correct that we have higher margin. I will not go too far in elaborating exactly where the margin increase is stemming from. I said it was kind of a product-market mix effect and I'm not certain it will be sustainable in the long run. So I'm not promising that we will continue to run 2 percentage points above what we have done historically. So there are some mix effects in here. More precise than that, I don't think we want to be exactly when it comes to the profitability side.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Espen. The second question also from Kristian is, "On the order intake, could the 17% organic year-over-year growth also be interpreted as a flush given that your past 3 quarters saw negative year-over-year growth organically? Should we expect such volatility going forward as well?"

[Stefan Ranstrand, President & CEO]

Oh, that was a complex question. I hope we understood it. But anyway, let me try to start and you fill in, if I'm not clear. So we have -- I think we can look into 2 elements. We're talking about the Collection business now, right? And we're talking about 2 elements here. Sorry?

[Georgiana Radulescu, Director of Investor Relations]

The Sorting business order intake.

[Stefan Ranstrand, President & CEO]

Ah, the Sorting...

[Espen Gundersen, Deputy CEO & CFO]

The question was related to was there a flush we saw? Or is this a sustainable higher order intake in the portfolio?

[Stefan Ranstrand, President & CEO]

Sorry. Yes. Well, I think this question is very much a repetition of what we had before. So as I said, we see increased momentum, both in Recycling and in Food. Recycling follows the long-term trends where there is a demand for circularity. There is a legislation drive in many parts of the world where waste dumps are no longer allowed, carbon dioxide or greenhouse gas emissions needs to be managed, and the recycling sector is very important here, and -- where they simply have to handle the waste. And that is rather to accelerate as we go forward. European Union is advanced here with a single-use plastics directive. Legislation is critical. And very few other regions are as advanced. But we see that's moving on. We also see the -- as of yesterday, the leading nations are talking about carbon greenhouse gas emissions, this will play into this sector as well. So these are drivers that are underlying. Not everything comes immediately, but in the long run, this supports our industry. On the Food side, there's been quite an under investment in the recent couple of years due to, one side, the pandemic and also in U.S. due to the trade war situation with China. And we have, especially on the process side, seen that for the last 2 years. Going forward, the demand for high-quality food is not going down. It is -- continues to grow. Our customers need for automation, for quality control of the products and for food safety are steadily increasing. Higher requirements for hygiene is coming into legislation and regulations and all that speaks for more sorters. So also on this side, I think there is a stable underlying demand that will increase over time. I hope that gives an answer to the question.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Stefan. I will continue with just another question on the order intake from Elad from Picard Angst. "Could you please elaborate a little bit more on the impact COVID had on your Recycling business, minus 33%? Why this has been so hard hit by the pandemic? How do you see that evolving over the next couple of quarters?"

[Stefan Ranstrand, President & CEO]

Right. So if we look into the Recycling business, as we saw when Espen presented before, we had actually 3 quarters with low order intake, second, third and fourth quarter, a light recovery in the fourth. But in general, that, of course, has emptied the order backlog so that when we came into this year, we had a low order backlog and that now plays into the quarter. We estimated 60% conversion rate, we ended at 58%. So we are fairly close to what our estimate was there. So going forward now, we anticipate that the momentum in this industry is strengthening. We have actually -- as I said before, we have seen being stronger in the period. So I hope I respond rightly on the question. But we see that as an explanation. And also, we've had challenges to serve customers. So spare parts sales is lower both in Food and in Recycling because our technicians have been limited in their ability to travel out. And many new plants have also been delayed due to uncertainty reasons, both in Food and Recycling due to financing, if the business is uncertain, financial grants are maybe not given in the same way; and due to fluctuations in commodity prices. That's now being stabilized and more positive view is changing to a positive way.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Stefan. The next question is from Jørgen Bruaset from Nordea. "Have you seen any bottlenecks in the value chain, yours or your competitors, due to efforts against forced labor in China?"

[Stefan Ranstrand, President & CEO]

Simple answer, no. I'm not aware of anything like that. We have a supply base in China, but most of that is high tech. So it's rather on the coast. So it's nothing on our radar screen as we speak.

[Georgiana Radulescu, Director of Investor Relations]

Yes. The next question is from Daniel Haugland from ABG. "Gross margins are below seasonality and last quarters in Sorting. Could you provide more color on this?"

[Espen Gundersen, Deputy CEO & CFO]

Yes. It's not much down, but what you see is volume related. And in TOMRA, the cost of goods sold is mainly linked to revenues. So gross margin is not that influenced by revenues. And the other way around on OpEx, where it's mainly fixed, not dependent upon the revenues. But there are some fixed elements also on the COGS side. And when you have lower revenue like we did in the TRM, you have some negative effect on the margin. So that -- the small effect you see is volume related.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Espen. The next question is from Carl Jørgen Flaen from Pareto Securities. "There have been some delays of deposit scheme introductions over the last years. How do you see the risk for further delays of upcoming scheme given the situation we are in today? And can you comment some on the recently announced delay of potential DRS in U.K., excluding Scotland?"

[Stefan Ranstrand, President & CEO]

Yes. The question is very much beyond our control. There are some delays. But I think we're also seeing positive moments. So I think the picture is mixed. We have seen some accelerations, especially the bigger countries where it's -- we're thinking about France, U.K. It's rather complex and it's a big move. And there are many voices, so you would have arguments from the retail industry, from the bottle industry, from the waste industry. They're all one way or another affected by this. So navigating that in the landscape is not so easy for the politicians. They want to implement a system that is good for the society, good for the economy and good for the environment. So that's what they are striving for. And striking the right balance here is not so easy. And then as it happens, we're always having something new on top that is bothering the politicians like the pandemic. And of course, the priority setting is not that easy. I'm actually quite overwhelmed and positive about -- despite the pandemic that we see the stickiness of the politicians and the commitments to the environmental situation. So we are not so worried about this. We see -- I'd rather see that we are really seeing evidence for a trend here that most countries will actually embrace such a DRS system in the European Union. Also Australia, for instance, they have put up this scheme. They are now also banning -- or they have banned exports of waste. And again, that calls for solutions that is not only collection, but, again, circular economy solutions that if you ban export of waste, you really need to make sure that you find a new way for that waste within the country. In the past, it was easy to collect it and just dispose of it by exporting it. Now when that's closing up, well, then you have to build novel solutions. And that's exactly what we are trying to do with the players in Australia. So I think that my assessment, our assessment is that we are rather positive about the wave happening here. There will be some accelerations. There would be some delays. And they will happen, and that's it. I can't answer more than so.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Stefan. We have a few more questions that are coming. The next one is from [ Clement Moklu ]. "You mentioned a very clean balance sheet. Do you plan to do some M&A or return to shareholders going forward?"

[Stefan Ranstrand, President & CEO]

Yes. So we are pleased to have a strong balance sheet. It's important for us. We want to have a high-quality, stable company so that we have the means and resources to pave through difficult times like pandemic and that we have the ability to do meaningful acquisitions if needed. As you know, we are having an ambition to be #1 wherever we are playing. So in Collection Solutions, we are #1 and that's our ambition to remain there. In Recycling Mining, we are #1 in every field we play and we want to remain so, and also in Food. Food, we are less #1. If you look at the totality, we have about estimated 25% to 30% global market share. That's an area we want to continue to grow. To grow here will require both organic investments in -- or cost at least, in new products, in people and processes. But we are also open to meaningful acquisitions. On top of what I talked about, we are investing in building up the circular economy and that's only early stage. So we might require more investments there. Organic and/or inorganic, that is yet to be decided. And we also need to be prepared. There might be some throughput lease markets coming up, which will require our balance sheet to be used. So we rather make sure that we have enough resources, war chest, to both go organic and inorganic in our growth ambition and we are a growing company. When it comes to if more should be paid out to shareholders, that's a decision that the Board is discussing and then deciding on for the general assembly every year. For this year, we have already announced the dividend proposal. So yes, for this period, we have further no comments on this topic.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Stefan. The next question is from [ Lars Bjerke ]. "Good morning and congratulations on the strong report. You said that you will be affected by the semiconductor shortage. Could you give some more color on why and how big this effect will be for TOMRA in the coming quarters?"

[Stefan Ranstrand, President & CEO]

Very difficult to give a precise situation. We have teams working on this. Luckily, we have rather predictable business and we have been early out securing supply. But we are also seeing that as the situation intensifies, the challenge increases, we are also becoming more challenged. Until now, we have been fine. Right now, we are fine. And it really depends on how long this situation goes on, the effect of us. I don't know if you want to add any flavor to that, Espen.

[Espen Gundersen, Deputy CEO & CFO]

Yes. The wording -- the question was phrased that we said that we will be affected. But that's not what we said or at least not what we intended to say. That we believe we will get through this without any significant negative impact. But some of this is outside our control also. We are dependent upon suppliers and their suppliers again, and there's a value chain that -- It's like almost like the toilet paper you saw when the pandemic hit us that everyone wants toilet paper, and now everyone wants semiconductor. So there is kind of a total of all this action you see out there that could potentially create some constraint on the value chain. So this is just that it's a risk that we, like almost all of the technology providers, are facing these days. So we just mentioned it.

[Georgiana Radulescu, Director of Investor Relations]

The last question is from [ Gert Van der Stappen ]. "Which circular economy initiatives could lead to revenue increase in the short to medium term and have the potential to become a new business unit? Does TOMRA have the necessary knowledge to tackle these new applications on its own or are partnerships needed, for example, like in textiles?"

[Stefan Ranstrand, President & CEO]

So the way we are working is that we are both working on the circular economy side in advancement on the supply side. So here, we have the example, which we presented in the last quarter with the investment we have made in a test facility. Here, we are working on companies like Borealis and Zimmerman, These are the 2 partners in that regard. And the ambition is that we, all 3 together as partners, are able to take unsorted waste and make a high-quality plastic resource out of that. So again, this illustrates collaboration. And I think collaboration would be key here. We will -- we are also working on the demand side. So we are in contact with many brand owners and producers. And an example for that was, of course, the yogurt containers, which we saw on the presentation here. So there will be activities on both sides. On the technical side, in having the ability to supply material that has the right quality and is able to meet the quantity expectations. And here, critical for that is to collect in a good way. So advancing our collection technologies both in RVM, but also beyond that, and help, working together with others, to upgrade the capacity or capability to process. Again, quality and quantity are the things here. And of course, making that as affordable as possible. Downstream then really working with different brand owners, making examples. And really as project -- seeing more as a product business, product by product, establishing successes. This is the way we're going to have to work. In addition to that, we have to work on, and we do, work on legislation through our governmental affairs discussing with regulators. And this could be questions about landfilling, could be a question about demand for collection. You see examples of -- I'm not saying that we have influenced that, that plastic tax in Europe, plastic tax in the U.K. These are legislations that are critical. But also to allow recycled content to be used as plastic in food grade. So it's a complex world. It's a big ocean of opportunities and matters to work with, and we just have to take step by step. But rest assured, we are in all corners. So pinpointing different initiatives I think they will evolve. I think you have seen how we work with Cleanaway in Australia, starting from collection, also working down the value chain there. I see -- we talked about today what we do with Viridor. You see what we do in Germany with the Borealis Zimmerman. These are all examples for how things evolve. And since this market is expanding, becoming a market is new. And as we are advancing our know-how, I think it's difficult to describe exactly what happens. One area, which we are investing a lot in here is also to enhance our digital capabilities. And that's for sure an area where also resources will be difficult to secure, and we are working on that. But that's also extremely critical because you need transparency, you need control of the value chain and you also need to demonstrate for the regulators and also for the industry what you can do in the value chain process.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Stefan. We have, in fact, one more question that came in. "Looking at your 2023 financial targets from the Capital Markets Day 2018, are you behind or ahead of the curve you expected?"

[Espen Gundersen, Deputy CEO & CFO]

Back then, we said 10% growth on top line as a minimum -- as an average for the year and 18% EBITA margin. We -- of course, we have got a setback the last year because of some lost momentum during the COVID crisis. But we have a target to still delivering upon what we communicated back then. On the bottom line, we are below the 18% and this is stemming from Food. Now we are transparent, so you see the division and Collection and TRM is performing. So it's -- but if we manage to get to 18% is a question of how fast we manage to get Food to improve their profitability, and that's a clear long-term target. There are many good initiatives in that respect. Time will show how fast we will get how far on that.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Espen. And we have one more question from Jørgen from Nordea. "If you would look at M&A to strengthen your presence in Food, would you favor smaller bolt-ons? Or would you consider bigger transactions?"

[Stefan Ranstrand, President & CEO]

I think the question -- thank you for the question, it's good. We view it a different way. So we look at how does it fit in our strategy? Would it complement us from a geographical perspective? Would it complement us from a technology or portfolio element? Would it enable us to serve our customers better and give them more values than without? And is it something that it's more efficient to acquire than we develop ourselves? These are the kind of boxes we will look into here rather than seeing if it's small or big. I think we have demonstrated our capability to take on both small and big. So we are not limited by that. We look into what is more meaningful from a strategic point of view.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Stefan. Thank you, Espen. This concludes our Q&A session.

[Stefan Ranstrand, President & CEO]

Thank you very much for attending, and we look forward to seeing you soon again.