Tomra Systems ASA

OSE:TOM

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, everyone, and welcome to our second quarter results presentation. My name is Georgiana Radulescu, and I'm heading Investor Relations here at TOMRA. With me today, I have Tove Andersen, CEO; and Eva Sagemo, CFO.

Before we start, I would like to remind everyone that the presentation is sent live from our headquarters here in Asker. And because there is a small lag between the presentation here and the actual webcast, we would like to encourage everyone to post their questions in advance by using the Q&A tool which is embedded in the webcast.

With those being said, I will hand over the word to Tove.

[Tove Andersen, President and Chief Executive Officer]

Thank you, Georgiana, and welcome all to our second quarter presentation. This quarter confirmed the strong momentum that we saw in all our divisions coming out of Q1. And the drivers behind this is the global mega trends linked to decarbonization, circular economy and automation. So today, we present a quarter where we have all-time high revenue, order intake and order backlog.

Our revenue for the quarter ended up on just about NOK3 billion. That is then up 10% versus the previous year, currency adjusted. We actually had all-time high revenues in all 3 divisions in the quarter: Collection were up by 6%; Recycling, 25%; and the Food division, 7%.

On gross margin, we ended up on 42%. That is 3 percentage point below last year Q2, but it is 2 percentage point above where we were in first quarter this year. We did see lower margins in Collection and Recycling partly driven by that we have a time lag between our cost increases and price increases to the customers. But also, we had negative product mix in both of those divisions in the quarter.

In Food, we saw higher margins in the quarter, 1 percentage point. And that's also where we have the shortest time lag or lag between order intake and deliveries.

Our operating expenses ended up on NOK841 million compared then to NOK746 million last year. This is due to increased business. We are increasing our sales, and also, therefore, have to increase our costs. We have seen high activity level in all our areas. Also coming out of the COVID period, we have now had reopening of country borders. We have had finally physical trade shows happening and physical sales events, which has been important to drive our business expansion.

In addition to that, at our Capital Markets Day in June, we launched an ambitious strategy for TOMRA. We want to double our business within 5 years. So we are continuing investing in future-oriented activities. This then gave an EBITDA of NOK438 million, slightly down from last year. Despite that, we then have then increased cash flow. Cash flow from operations were NOK310 million, up then from NOK286 million last year.

Looking then at our order intake. As I previously said, we had all-time high order intake, 15% up currency adjusted versus last year. Recycling, the strongest contributor, with 19% increase, but also good increase in Food, which also had quite a high order intake last year, so they had an increase of 12%. So despite that, we have had high sales. This high order intake has also then given us an all-time high order backlog, up 14% currency adjusted. So this provide a solid foundation for the next quarter to come.

Other items are worth to mention. First of all, inflation and supply chain challenges have continued to be a pressure point in the quarter. We will say that it has not really improved compared to what we saw last quarter, but it has somewhat stabilized. Pending -- or uncertainties about the pending recession is not really impacting our business currently. However, of course, this is something that we monitor very closely and take into account when we make decisions and how we are setting up and acting both on OpEx and contracts and commitments.

We believe TOMRA is fairly resilient versus a recession. We have a diverse portfolio. We are operating in many regions in the world. We operate in many different business segments. And many of our business segments are essential businesses. And we have a strong recurring revenue. However, of course, we will be impacted if such an event happens. So it's also important for us to keep this under control, have a tight OpEx control and also keep a strong financial stability and solidity in case a recession is coming. Also, as I mentioned a bit earlier, a good pipeline is building then also from that we are now back on having trade shows and physical events.

Let's then dive into the different divisions, and we start with Collection. Collection had a good quarter, with an all-time high revenue. However, component shortages and cost inflation continue to put pressure on margins, as also we were talking about in last quarter. We have had this quarter high activity level on price increases. Our ambition is to pass on our increased cost to the customers. And we have managed to do that with many of our customers and in many segments. However, there is a portion of our contracts in Collection that have a period or a time or doesn't expire before in 1 years to 2 years, so the improvement in gross margin in Collection will come gradually.

Highlight in the quarter is the contract extension in New South Wales. Some of you might remember that this was a contract we then entered, and it started 1st of December 2017 and was a 5-year contract. The contract actually represent almost 10% of the current revenue in Collection, so it's a very important contract for us. And we have now signed a 4-year extension.

As part of signing that, we are also committed to increase the collection points in New South Wales with approximately 50 new collection points, which also hopefully would have a positive impact on the collection rate. And this is a throughput market where we get paid per containers that is collected. So this renewal was, of course, important for the future revenue in Collection. But it was also a good confirmation of the strong position we have in existing markets when frame agreements will come up for renewal.

Other highlights. I talked about the good momentum. If you look then a bit per region in Europe, the sales were close to last year levels. Romania contributed positively and compensated for the reduction in Netherlands, sales in Netherlands, because last year Q2, we still have sales in Netherlands linked to their go-live of a deposit return system 1st of July.

If you look at the throughput markets, we had a positive volume development in North America. The ramp-up volume in Latvia is at a satisfactory level at the end of June. You might remember Latvia went live 1st of February with the deposit system. And when you start this new market, there will be a gradual ramp-up until you come to the level that is the target of the system.

At the Capital Markets Day, we communicated that we have an ambition and want to position ourselves for all new deposit return markets in Europe. First half of this year, we have established new subsidiaries in Turkey, Hungary, Poland, Bulgaria and Serbia. If you look at timing, potentially or at least the way we see it, Hungary might be the closest opportunity. Hungary is currently restructuring their whole waste management system to be able to meet the EU targets. And deposit return system is expected to be one element of that restructuring. No implementation, decision or date has been communicated yet, but we believe this is going to be an interesting market, and we are positioning ourselves for that.

Let me then also go through some of the other key markets that you can see here on the right-hand side. The markets we list here are the markets that have a firm decision or a firm date for when they will go live with a deposit return system or a modernization of that. And I'm just going to highlight some of the new updates versus previous quarter.

Netherlands, nothing new there, still plan to go live with an expansion of their system then for cans, 1st of January next year. Romania, I talked about that we do see positive -- or we do see sales as a positive contributor in this quarter in Romania. The official go-live date is October. We don't think everything will be ready by then. So either there will be a longer period for rolling out the infrastructure or there might be a new date agreed between the government and the industry.

Scotland, no new, still planning to go live August next year. Victoria and Tasmania are now preparing themselves for the go-live in 2023. In Victoria, they have launched now a tender for the infrastructure provider for the system implementation.

Quebec came now in June with approving -- or in June, they approved the final regulation links to their modernization and expansion of the current system. What they will do is that they will increase the deposit value to Tencent, which is a good incentive for the consumer. And they will gradually include all containers into the system, including then carton. So we have estimated that the scope of the system will go from today, approximately 2 billion containers annually to 5 billion containers. And the start date of this is 1st of November 2023, with then gradual increase of the scope.

Ireland, no news, still expectation that it will be a go live late next year or the year after. Connecticut, we communicate on this in the previous quarter. They are then also modernizing and expanding their system from 2023 and onwards. And in Australia, still the plan to go live January 2025. But of course, in addition to the markets listed here, there are many processes going -- or they're going on processes in many other countries in the EU to position themselves for how to meet the targets in the single-use plastic directive.

Let's then move to Recycling. In Recycling, we saw a very strong top line growth in the quarter of 25% and an all-time high order intake and order backlog, confirming then the strong momentum in Recycling.

The key drivers behind the momentum we are currently seeing in recycling are really 3 key drivers. One is legislation, legislation linked to waste management, it could be linked to minimum recycled content, and plastic tax as, for example, going to be introduced in Italy and Spain now. So that is one of the key drivers. A second key driver is decarbonization. Many industries see now as part of the road map to net zero recycling is one of the key enablers. So that is also driving the demand for recycled content. And the third driver is high commodity prices, making recycling material, more profitable than producing virgin. So these three drivers have then continued to push for the high demand levels in all recycled materials. And we see a good market momentum now in all segments that we operate in and also in all main geographies. So this then also materialized in the high order intake that we see in this quarter, 90% up if you then adjust for currency.

Looking at segments. In the order intake, waste sorting is growing steadily. But also, we have then especially seen in the quarter that the metal recycling segment has been strong. But also for us, it's very good to see that the new segments that we are focusing on, like wood and textile, that we also see good and promising activity level in those.

Another indicator for the strong sentiment that we see in this segment is the recycled -- or the prices of recycled material compared to virgin material, illustrated here with PET. We have shown this graph a few quarters now to show that over the last period, how the price of recycled PET has been higher than virgin PET. It was interesting to see now the last month is that it's being decoupled even more than before. So we have had the virgin PET prices really stabilizing and actually partly going down, while we do see recycled PET still increasing, really highlighting the strong demand for recycled content.

Another highlight for the quarter is that trade fairs are finally back and up and running again. One of the key ones within recycling is the IFAT [ph], which is the largest global trade fair for environmental technologies. It was a very successful event, very well visited from all over the world, including then emerging markets. We use these events, of course, to engage with our customers, but also to showcase innovations and continue our thought leadership activities. So also at these events, we do hold press conferences. We hold different what we call TOMRA talks where we share our viewpoints with the industry on the key elements to drive circularity.

One of the things that we launched at IFAT is our new extract, which is an upgrade the machine for aluminum recovery and processing. You can see from the graph here all the different improvements that we have put into this machine. But the key thing is higher throughput, as you can see here, for high-speed sensing, but also higher accuracy, that you can see from the upgraded sensor that we are using, but also to make it easier to maintain, as you can see from the capture changes that we have made. Also, what's interesting with this machine is that it's very easy to adjust what you want to optimize on. Do you want to optimize on recovery or do you want to optimize on purity. So that our customers can really optimize their profitability in a very good way.

With the high growth that we are currently seeing in recycling and this is, of course, a significant challenge to keep up with this high growth. At the same time, for us, it's very important to continue to drive innovations like this. As we presented at our Capital Markets Day, our strategy in recycling, it is to grow within the existing segments, but then to develop new segments and opportunities through innovation. So what we have done is that we are ring-fencing selected resources to ensure that we can drive this continued innovation and that also short-term operational requirements is not going to jeopardize our future growth ambitions.

Let's then move into Food. So second quarter in Food confirm the positive sentiment that we felt in first quarter. And with a good conversion rate in the quarter, we have then delivered an all-time high revenue in Food. The drivers here is good market demand and also increased labor costs that are supporting the investments in automation. And we see a good momentum both in process food and fresh food and also in all geographies that we are present.

Looking then at the order intake. The order intake was up 12% compared to a high quarter also last year. And as I said, it's good momentum in both of the segments. And if you look a bit below that, it was especially citrus, that was a strong category for us in this quarter, but also we see good investment level in vegetables and fresh cut within the Processed Foods segment.

Last quarter, we talked about some concerns linked to delays on deliveries, not from our side, but from our customers. That has now stabilized, and that was because our customers had delays of deliveries from other suppliers. That has currently stabilized. And we have more visibility on the timing of our order backlog and more certainty on the timing of the deliveries in our order backlog.

Also here in Food, we have had a good momentum in the quarter, supporting then driving up the order intake linked to trade fair shows and physical sales activities. In general, we see good support for investments in the food supply chain. A pending recession does not currently impact the business. However, in our discussions with our customers, there are fears of recession, and this is one of the topics being discussed. But however, currently, we don't really see that impacting the investment decisions or willingness to invest.

On supply chain, situation has still been challenging in the quarter and the visibility is still somewhat limited. But the overall risk level has stabilized. And we have been able to continue to deliver according to our customer commitments. And we have actually been able to do that in all three divisions. And still, a challenging external market environment, which I think has been a very impressive result by the organization, and of course, extremely appreciated by our customers, which also is going to be important for driving the relationship with them forward and the future growth. And also in Food, we then see that price increases are coming through and improving our margins again.

So with that, I conclude the business update. And I will hand over to Eva, which will go through the financials and outlook.

[Eva Sagemo, Chief Financial Officer]

Thank you, Tove. And starting at the group P&L for the quarter. As we have said, we have a good quarter with 10% growth on revenue, ending revenues with NOK3.054 million. So we are up in Collection, 6%, ending the quarter at NOK1.519 million. And in Recycling, we are up 25%, ending the quarter at NOK552 million. And up also in Food with 7%, ending the quarter at NOK983 million.

Our gross contribution for the quarter was NOK1.279 million, which gives us a gross margin of 42%. That is three percentage points, down from same quarter last year. And the main reason for that is we have both some negative product mix, but also the normalization in, for example, in Collection, with higher sales in the Netherlands back in Q2 2021. We also still, as Tove mentioned, we have a negative impact on the cost inflation and supply chain disruption. But on the positive side, we have some positive impact from currency then, especially on the USD.

Our operating expenses ended at NOK841 million for the quarter, which gives us an EBITDA of NOK438 million and an EBITDA percentage of 14%.

If we look into Collection first. We have a good momentum in the U.S., driven by volumes and commodity prices, as we also saw in Q1. We also have new sales in Romania, which is also what we saw in Q1, that Romania is ramping up for DRS. We have increased volumes in Australia, but just slightly because in Australia, they have suffered from bad weather also in this quarter. But comparables with Q2 last year was also a low quarter on the volumes because of lockdown in Australia.

What we see in markets in Europe, that they are stable during the quarter. But Latvia is starting to build up, that's 12%. It's a throughput market, and it will take some time before volume is up at expected collection rates with DRS market.

So revenues for the quarter ended at NOK1.590 million, as I said, 6% up. Gross contribution at NOK572 million, giving us a gross margin at 38%. That is 6 percentage points down from same quarter last year. And in Collection, we had negative mix -- project mix in the quarter.

Also here, as I said, the normalization from the sale in the Netherlands in Q2 last year, but also still negative impact coming from cost inflation and supply chain disruption. And as Tove said, on the pricing situation in Collection and also what we highlighted back in Q1, we are having those long frame agreements in some of our markets that are having the time frame of 1 years to 3 years. And here, it will take some time before we fully recoup on the cost inflation. But in other markets, we have been able to increase prices, that you will see gradually impacting our margin going forward as well. We have also a positive impact from currency in Collection, especially from the U.S. market.

So the operating expenses ended at NOK347 million, which gives us an EBITDA of NOK225 million and EBITDA margin of 15%. Looking at operating expenses, we are ramping up in new markets. And as Tove mentioned, we have established us in some new countries now the last quarter. So we are ramping up. And we have talked about the run rate before at approximately NOK150 million for the year. And now we are increasing that ramp-up run rate to NOK200 million for the year.

Looking at the Recycling, we have a really good momentum in all markets and all segments. So waste and plastic, they drive order intake at double-digits. And also commodity prices at high level, drives growth in metal recycling and upgrading of material. So revenues is up 25%, ending at NOK552 million.

We have a strong momentum in Europe, but also in Americas, and that is something that we also saw back in Q1. Our gross contribution ended at NOK 273 million, which gives us a gross margin at 49%. That is down 4 percentage points compared to same quarter last year. And the reason for that is still we have a negative impact from cost inflation also in the Recycling.

We have increased our prices gradually in Recycling. And because of the lead time in Recycling, what we see -- what we talked about also before, it's more or less on the 6 months lead time. You will see this coming in later. We start to see a small increase, but also, you would see a bigger impact later in the year.

In this quarter, we also had a negative mix where we sold less of waste and more in the metal. And what we also see is that we have sales in the new segments, such as, as Tove mentioned, the textiles, but also food segments. And these are segments that are having high margins, but not as high as we have in the waste segment. So that is something that we will probably also see going forward impacting the margin.

Our operating expenses ended at NOK172 million, which gives us an EBITDA of NOK100 million and an EBITDA percentage of 18%. Order intake is up 19% compared to same quarter last year and ending at NOK675 million. Order backlog, up 17% compared to same quarter last year ending at NOK980 million. So we are talking about all-time high levels.

For the next quarter, we estimate a 65% conversion ratio. I just want to highlight that this is, of course, not guiding for revenue for the quarter. It is our estimation that 65% of our order -- current order backlog will materialize as revenues in Q3.

Looking at Food, very strong quarter, good market demand. And increased labor cost is supporting investments. We came in above estimated conversion ratio, and that is because the customers, they pushed for deliveries, and we were also able to deliver. So we still see that freight is a pressure point, but we were able to deliver also on the availability on the freight situation. So revenues were up 7% compared to same quarter last year, ending at NOK983 million. So strong in Europe and in Americas, but also in Asia, especially in China this quarter.

Gross contribution ended at NOK434 million, which gives us a gross margin at 44%. That is the 1 percentage point up compared to same quarter last year. And we are still seeing some negative impact from cost inflation, especially on the freight side as we saw in Q1. But this month, we have had a positive effect from the currency in U.S. dollar, but also good volumes and a positive product mix, which is driving good margins in this quarter for Food.

Operating expenses ended at NOK283 million, which gives us an EBITDA of NOK151 million and an EBITDA percentage of 13%. Operating expenses is up. And as Tove mentioned, we are seeing high activity in this business division with the opening of borders, and having the opportunity to travel, attending sales events and market -- driving market activities is some of the activities that drives the OpEx expense this quarter.

Looking at the order intake, is up 12% this quarter compared to Q2 2021, ending at NOK1.043 million. Order backlog is also up 12%, ending at NOK1.380 million in June. So for the coming quarter, we estimate a 70% conversion ratio of the current backlog. Also here, not guiding for revenue. So we estimate that 70% of the current backlog of NOK1.380 million will materialize as revenues for Q3.

Looking at the balance sheet and cash flow. So we still have a strong balance sheet in TOMRA, ending the quarter with a equity ratio of 46%. Our leverage ratio is at approximately one times net interest-bearing debt over EBITDA. In the balance sheet this quarter, you would see some currency impact of approximately increased values with 5%.

If we compare the balance sheet from year-end to this -- end of this quarter, we have done investments in Latvia, which is a throughput market, at approximately NOK200 million. We also have increased levels in inventory. We have machines that are ready to be shipped. But we have also -- so based on a higher backlog, so that is ready already now. And we also have started to prepare for new markets in Collection.

As we mentioned earlier, Australia, where we won 4 new years in New South Wales, will require more collection points going forward, but also in Romania and other new markets in Collection. So we are preparing for that. But in addition, we have continued to securing parts and components for future deliveries. We are also a bit up on receivables, and that's mainly because June came in very strong in the quarter.

Cash flow from operations ended at NOK310 million for the quarter, which is slightly up from same quarter last year. This quarter, we also paid out NOK886 million in dividend. That was approved at the AGM in April and paid out in May.

Looking at currency risk and hedging policy, we have no changes in our hedging policy. We continue to do that as before. But what we see this quarter is that we have some currency impact on our growth, explaining approximately 4% of the nominal value of the nominal revenue growth this quarter. Approximately one percentage point of impact -- positive impact on gross margin and approximately 0.5 percentage point on our EBITDA with positive effect. And as I mentioned, our balance sheet is up 5% overall, related to currency this quarter.

Our financial position. We have 1.5 years of weighted average debt maturity and currently available on U.S. credit lines of NOK518 million.

Looking at the outlook. So on the growth side, there is a long-term demand for better resource productivity as a result of the mega trends, as Tove mentioned. And technology is an enabler for that, and we believe that TOMRA is perfectly positioned towards these trends. We are facing some challenges on the supply chain and on cost inflation, but we are taking actions to mitigate that, and we believe that, that will, of course, be important going forward.

So looking at Collection. We have high activity related to preparation for new markets. As we see, Romania has materialized, with approximately NOK150 million for this first half year. And we expect that to also continue for the next half year. But here is, of course, some risk related to it because it's a bit unclear on the October date. So it might increase in speed, but it can also be prolonged with maybe also a new date in place in Romania. But this is what we see now and what we would expect for the next half year.

Also, as Tove mentioned, the Netherlands will introduce cans to their existing system 1st of January 2023. We expect stable activities in existing markets, but also, that volumes in Australia will increase going forward and that also Latvia will increase volumes according to expectations for our new throughput market. But of course, quarterly performance will be dependent upon timing of new initiatives going forward.

On the gross margin, we expect that slightly to increase going forward, both because of new markets but also on the volumes that I mentioned, but also that we do not expect to purchase in the spot market at levels that we did at the second half last year. In addition, as we said, we will have -- we have increased the ramp-up run rate to NOK200 million for the full year.

In Recycling, it's -- the positive momentum is assumed to continue, so in all markets, in all segments. So we see the higher demand for quality recycling and recycling material upgrading. And that will drive growth also for the next quarter. With a conversion ratio of 65% of the current order backlog, we will have a good growth in the next quarter as well. So as we have said, it's really the demand for recycling material that is expected to drive the growth, both on the legislation side, but also business needing and wanting to be sustainable.

On the Food side, we expect good demand signals and investment sentiment to continue, both in processed food but also in fresh food. We have a strong order backlog, and that is also with a conversion ratio of 70% of the current backlog. We expect a healthy growth also in the next quarter. So the driver is the need for optimization and increased labor cost in that market.

When it comes to supply chain that is still a pressure point. So the inflation is still there. And the current forecasts indicates that it will not turn back to more normal level before maybe summer next year. So this is something that we are still facing. And we have taken action plans, of course, both to cost engineer our products, but also to secure supply of goods and increasing prices to our customers. But we have been through quite some challenge at times over the last months, but also back in the COVID times. So we believe that we are well equipped to be able to deliver on our customers' obligations, which is very important for TOMRA.

So it's still low visibility. It's still a lot of unclarity and uncertainty, but this is at least what we know now. On the currency, since we are reporting in Norwegian kroners, we will have exposure to euro, but also USD going forward.

So with that, I think we end this section and can move to the Q&A part, Georgiana.

[Georgiana Radulescu, Investor Relations]

Thank you, Eva. Thank you, Tove. We have already received a number of questions. So I will start with the first one. It's from Emil OS at Pareto. Hi great second quarter, congratulations. Why is net financial income expense is so high at NOK54 million?

[Eva Sagemo, Chief Financial Officer]

Yes. That is because of currency exposure mainly and because of the changes in the USD that we have seen during the quarter.

[Georgiana Radulescu, Investor Relations]

Thank you. The next question is from Aurelio from Morgan Stanley. I noticed you have renamed Recycling Mining to just Recycling. Is this an indication that mining is not that relevant going forward for the business?

[Tove Andersen, President and Chief Executive Officer]

Yes. We decided to change the naming to more represent the business according to the size of the different areas. If you look at mining, mining of the TOMRA Group is less than 2% of our revenue. If you look within Recycling, mining is approximately 10% of the revenue of Recycling. So we think it's a more correct way to explain that segment, that we call it Recycling, and that we have different -- or that division, and then we have different segments that we operate in. And ore sorting, ore sorting is one of the segments within that business area. So mining is still an ore sorting segment that we focus on, where we also see good opportunities going forward. So it's more to have an accurate representation of the different importance of the different parts of the business.

[Georgiana Radulescu, Investor Relations]

Thank you. The next question is also from Aurelio from Morgan Stanley. Could you please comment on the impact from frame agreements in Collection margins? What was the impact in second quarter year-over-year?

[Eva Sagemo, Chief Financial Officer]

Yes. So what we would say is that on -- in the Collection, we are down 6 percentage points on the -- in the quarter on the gross margin. And as we said, it's a split between both the cost inflation and the normalization in the market compared to Q2 last year, but also the product mix. So what we would say is that approximately 4 percentage points on the gross margin is related to the cost inflation and not being able to increase prices at full in Collection in this quarter.

[Tove Andersen, President and Chief Executive Officer]

And that 4% also includes the effect of lower volumes in Australia and that Latvia is still ramping up.

[Eva Sagemo, Chief Financial Officer]

Yes, yes, that's correct.

[Georgiana Radulescu, Investor Relations]

Thank you. The next question is from Daniel Haugland from ABG. Food, impressive order intake development. Is this a follow-on effect from starting to attend trade fairs, again, for example, Fruit Logistica or is it more broad-based?

[Tove Andersen, President and Chief Executive Officer]

I think it's a mix. I mean we commented on this in Q1, that there has been something that we have been missing to be able to have the physical events with our customers to drive the order intake. I think this quarter, we have been able to have these engagement. And we've seen that has given positive impact on our order intake and backlog. But of course, it's not only that because also you need to have a strong market sentiment behind it. It doesn't help to meet if there is not a strong belief in the future demand and the benefit of automation. So it is really a combination, but it has contributed to the increase we see in the quarter.

[Georgiana Radulescu, Investor Relations]

Thank you. The next question also from Daniel is about the Collection margins, but is a slightly different angle. So Collection, you are seeing gradual improvement in gross margins. In Q1, it was down roughly 3 percentage points year-over-year, while in Q2, it was down 6 percentage points year-over-year, seems like a deterioration. Could you comment on this?

[Eva Sagemo, Chief Financial Officer]

Yes. So what we -- we had a strong Q2 last year with good margins, having sales in the Netherlands, for example, with -- which is an existing market, and also on the product mix, which gave good margins in Collection in Q2 last year. So this quarter, we have impact on the negative on the mix, so we don't have that positive impact, so we have a negative impact on mix. And also, we have this cost inflation that is reducing the margins or having the drop in the margins compared to Q2 last year. So I would say it's both on the cost inflation, but also on -- it's also on the product mix in this quarter.

[Georgiana Radulescu, Investor Relations]

Thank you. The next question also from Daniel, food backlog conversion, almost 10 percentage points above indication last quarter. Is this due to exchange rates or a shift of planned production for Q3 into Q2?

[Eva Sagemo, Chief Financial Officer]

Yes. So it's a combination of -- I would say it's -- the conversion ratio, we were kind of like on the lower side. We see that. And that was the information we had back in Q1, that we thought that this is what we will be able to deliver into the revenues in Q2. It's positive. We also said that back in Q1 that customers, they have delayed taking in projects and taking in products or sales. And this quarter, we have been able to deliver to our customers. They have pushed for deliveries, and we have also been able to deliver that. So that is the reason for why we see the conversion ratio that we came in higher on the revenue side. Was that the question? Yes.

[Georgiana Radulescu, Investor Relations]

Yes. Thank you, Eva. We don't have other questions from the audience. So that concludes our Q&A session and our presentation for today. Thank you all for watching us, and see you next time.