Tomra Systems ASA

OSE:TOM

Earnings Call Transcript 2021-Q3

[Georgiana Radulescu, Director of Investor Relations]

Good morning, and welcome to our quarterly result presentation. My name is Georgiana Radulescu, I am heading Investor Relations here at TOMRA. And with me today, I have over Tove Andersen, CEO; and Espen Gundersen, CFO. The presentation is live streamed from our headquarters in Asker, Norway. So we encourage you to ask questions on the way by using the Q&A tool, which is embedded in the webcast. We will address your questions towards the end of the presentation. This being said, I hand over the word to Tove.

[Tove Andersen, President & CEO]

Thank you, and good morning, good afternoon, good evening all attending upon where -- from where you are joining us. It's a great pleasure for me to present the quarterly results of TOMRA for the first time, and I wanted to use this opportunity to also introduce myself quickly. I joined TOMRA from Yara International, the leading global crop nutrition company where I've had a long tenure. I worked there for 24 years in many different functions and also locations. I lived in U.K., Sweden and Belgium in addition to my home country during my period in Yara. The last 5 years, I was part of the corporate management. First, as responsible for supply chain, which also included global IT and procurement. Thereafter, I have segment responsibility for production, which included 28 production sites and 2 mining operations throughout the world. And the last position I had there was as EVP Europe with end-to-end responsibility for the region. By education, I have a Master Science in physics and mathematics and an Executive MBA. So what I bring to TOMRA is a long global international and industrial experience, but also experience in driving continuous improvement, driving growth, digitalization and business development. And personally, what drives me. So personally, what drives me is to learn new things. It is to do something meaningful and to create an impact. And I know and I'm confident that I will be able to do all of those 3 things in TOMRA. I then took over as CEO 2 months ago. And I have spent the first period trying to learn as much as possible as fast as possible. I've also prioritized meeting as many of our employees as I have managed and also other key stakeholders. And this initial period has really reconfirmed the positive impression I had of TOMRA before joining. TOMRA is a company of very competent and passionate employees. It has a strong technology foundation, and it has a really purpose-driven culture. Now somewhere I lost my trail, so I would need to see where was. And it is positioned in an industry of resource management, food and circular economy, which is more relevant than ever. So I really look forward to work together with our employees, customers and other key stakeholders to continue develop the company based on the strategic position and foundation we already have. So let's then dive into the quarterly results. We are today presenting a strong financial results. So in third quarter, we had both an all-time high revenue and an all-time high EBITA. The revenue was NOK 2.883 billion in the quarter, which represent a 15% growth compared to last year's Q3. All 3 divisions showed growth with Collection and Recycling Mining growing with 21%, but TOMRA Food was up 3%. The gross margin was 44% in the quarter compared to 46% last year. All divisions were slightly down on gross margin, but last year's Q3 was a strong quarter when we refer to gross margin. The operating expenses increased with 12% to NOK 748 million. This is due to increased activity as we are coming out of the corona pandemic but also increased investments in future-oriented activities. This then resulted in an all-time high EBITA of NOK 528 million and a strong cash flow from operations of NOK 596 million. We do see a good momentum in all key markets and segments we operate in. This resulted in a 35% increase in our order intake when we combine Recycling Mining and Food. And we also end the quarter with almost an all-time high order backlog, which is then just above NOK 2 billion. Regarding COVID, the operations and activities are starting to be back to normal, but we do still see some impact on our business, especially in the Food segment linked to traveling, meeting customers and so forth. But this is fairly limited. However, as many other technology-related industries, we are impacted by the component shortage globally. And I'm really impressed over how the organization has responded to this, searching for what kind of components that we can find and source in the marketplace and adjusting our products accordingly. I think it highlights the strength of TOMRA, the strength of the confidence that we have in-house, but also this culture of agility and can-do attitude where problems are really there to be solved. The situation is currently under control, but the supply situation still is challenging and represents a risk going forward. Let's then go into the divisions. There has been -- and we start with Collection, which have had a very significant activity level during the quarter, both in existing and new markets. As highlighted on the slide here, Latvia and Slovakia are getting ready for the launch of their deposit return systems early next year. In Latvia, we signed a contract in July with the Central System Administrator for providing the reverse vending machines for their scheme. TOMRA will supply between 800 and 1,000 automated collection points to make them this scheme as convenient for the Latvians as possible. The rollout is in progress, and we have already installed 130 machines. This will be a throughput model where we then get paid based on the number of beverage containers returned. In Slovakia, the setup will be a traditional return to retail scheme and where we will then sell the reverse vending machines. And we have, among others, signed with Tesco and expect to get a significant market share. New sales are already materializing in the quarter, as the retailers are ramping up to get ready for the launch of the scheme in January next year. Also in Scotland, we are preparing for the launch of the deposit return system and we have signed contract with one of the major grocery retailers during the quarter. The official go-live in Scotland is still July next year. However, there is a risk of delay even though nothing has been officially communicated around this yet. It's also positive to see in this quarter increased sales into existing markets. In the Nordics, one of the key drivers have been the launch of our new product, the R1. This is the multi-feed reverse vending machine, which then provides increased convenience for the consumer because you can come with a whole bag of beverage containers and pour it in at once. The picture on this slide is from Denmark last week, when the first retailer with R1 opened up and people were queuing up to deposit their beverage containers. And it's really fun to see the interest and engagement it brings, I think, it is a good example on how innovation can drive growth in an existing market. We also had good growth in Germany this quarter, mainly then linked to the introduction of the new identification requirements. We saw some negative effects in Australia because the deposit system was locked down for a period due to COVID. However, we do see a significant portion of this volume returning as people have been saving their beverage containers at home. On the right-hand side of this slide, you will see the update on the markets where the governments has communicated a clear plan for deposit return system. I already communicated or commented on some of them. However, in addition, I want to mention Romania. So a couple of weeks ago, Romania published a government decision to introduce a deposit return system in late 2022. However, there is significant uncertainty related to this due to the political instability in Romania. Then let's go to Recycling and Mining. And we see the good momentum continuing, mainly driven by 3 factors. It is regulation. It is increased focus on recycling and high raw material prices. Within waste sorting and plastics, the fundamental drivers are positive. And we do see an increased activity in the industry related then to investments in new facilities and equipment. And for us, this has resulted in high order intake and strong deliveries. And also, it's positive to see, which is shown on the graph here that over the last months, the price of rPET recycled PET has increased more than virgin PET and it is now higher, which really creates the right incentives for recycling. Also as the picture show here, we opened a new flake sorting test center in Parma in September. We have several of these test centers, which is an important part of our sales and development activity. Seeing is believing. And these centers enables testing of customer-specific waste together with the customer, with them present to show what our equipment can do and what is feasible to achieve. The metal recycling business is developing well after being a challenging segment last year. The order intake so far this year has been good and also well above the 2019 levels. The commodity prices are high at the momentum -- at the moment, which is an important driver in this business. And this has definitely supported the positive development we see in the quarter. And in addition to this, the focus on sustainability creates an increased expectation from consumers on the use of recycled content. And at the same time, the lightweighting of cars in order to make them more fuel efficient and reduce the CO2 has led to more use of aluminum and alloys in the car industry instead of steel and iron. And then to upgrade these nonferrous metals and create a clean fractions out of that you need advanced sorting technology, which really fits our competitive edge. So this is a positive development in the direction of really making high-quality secondary materials available for substituting virgin content. Then over to Food. And we do see that the momentum in the food service sector has turned to an increasingly positive one. Increased confidence in the sector drives investments and both our Processed and Fresh food segment shows a positive development. The order intake so far in 2021 has been well above 2020 levels in both segments of the business. In processed food, we see increased market confidence as the world gradually is turning back to normal after the pandemic. This drives investments into the food processing facilities. For us, potatoes have been the strongest category for this quarter, but we experienced strong growth in many other crops as well. If we then go to fresh food, we have seen throughout the COVID pandemic that home consumption has boosted the grocery business and thereby also fresh food. And it's positive to see that this momentum continues, and we had good growth in fresh fruit in the quarter, especially in kiwi and small fruits. And we included here an example on how we work by using cherries, as an example, because in Food, we apply a category approach. So we are organizing our activities in a customer-centric way to really respond to the key need of a crop segment. And the cherry segment is a good example on what we can achieve by doing that. So when we bought BBC in 2018, one of the planned synergies was to expand into new segments. And cherries was selected both because of the market potential, but also the quality requirements. It is a cash crop where consumers have a high-quality expectation, but also it is a crop that needs gentle handling. So this is really driving a need and a requirement for high-quality, high-performing accurate equipment, which really fits us in TOMRA. And we now have a portfolio of products that we offer into this segment. And during this quarter, cherry has become 1 of our top 5 crop categories. This is an example on how we work, and we work like this for all the key crop segments and this is one of the ways that we will then continue driving growth in the Food division. With that, I will then hand over to Espen, who will give you more insight into our financial performance.

[Espen Gundersen, Deputy CEO & CFO]

Thank you, Tove. As always, we take a look at the currency first. Currently, some headwind because the Norwegian kroner is strengthening and compared against same quarter last year, we are 3% to 4% down euros and dollars versus Norwegian krone. And this is also reflected then on the right columns in the coming slides where we show currency-adjusted figures. So revenues, as Tove said, is a strong quarter driven by collection and recycling mining on top line. Gross margin is down 1.4 percentage point to be precise, is down in all divisions, mainly due to strong third quarter last year, which is the highest gross margin we ever have reported and have some mix effects. There are although some limited cost effects increases also included here, but they are minor compared to other elements actually. OpEx is increasing at 12%. It's much about future-oriented costs, call it ramp-up in collection circular economy within TRM, but also the fact that we are going out over COVID. We are starting to traveling more projects that been put on hold are now revitalized and so on. So that is also part of the picture when we look at the cost side here. But bottom line, EBITA is increasing by 12%, and we are delivering on our financial target of 18% EBITA margin in the quarter. Moving to Collection. Best quarter ever on both top and bottom line. And the motor engine is more or less firing on all cylinders. Also in the somewhat mature market, we want to be cautious to call them mature because I think what we see now is good examples that it is possible to do better also in the markets where we have a high market share and all retailers have a returned system in place already. And I think the R1 that Tove mentioned is an important driver to see the growth in the traditional Scandinavian, Baltic markets and explains the growth there. Europe, Rest of Europe, great performance in this quarter. Slovakia is a contributor starting commencement 1st of January with the new deposit system. So we now see that machines are being placed preparing for this. Germany, new requirements related to security market it has driven volumes for some quarters in Germany now. So also that one is contributor of the Slovakian and German markets are explaining most of the positive deviation against last year here. Netherlands is more or less on the same level. Remember, they had commencement 1st of July this year. So back in third quarter last year, we started to see the ramp-up preparing for the Netherlands and now we are winding down again. So -- but all in, those 2 quarters are more or less equal. Going into fourth quarter, of course Netherlands will be negative. We'll come back to that one. Rest of the world is mainly Australia. Again, as Tove mentioned, the lockdown has had a negative impact on the volumes in Australia, though it started coming back. We will also expect to see some of this element in next quarter, meaning cans and bottles that would not return this quarter will return in October and consequently, positive the next quarter. OpEx is increasing. We have a new market, Slovakia that adds cost, and we have all the direct ramp-up costs of probably NOK 10 million above last year which explains partly the increased OpEx in this segment and EBITA healthy 13%. This from 1 division with a record high quarter to a new one. Also Recycling Mining had a great quarter top line spot on what we indicated 60% conversion ratio. So it equal to 21% growth. Gross margin, slightly down from high level, and that's mainly due to product mix. Still good cost control, taking into consideration that also circular economy adds a round figure NOK 5 million additional cost compared to the same quarter last year and also support the revenue growth and the future growth that we expect to see from this segment. And EBITA is consequently 23% up. If we look at the bottom right on the order situation, after some weak COVID quarters, we have now had some good quarters and also this quarter with 50% currency adjusted order intake growth from NOK 348 million to NOK 484 million. And also the order backlog is at an also close to all-time high of NOK 830 million, and this is despite a good P&L as several orders taken to P&L, they are explained, of course, by the good order intake. The conversion ratio is assumed to be 70%, 7-0 percent, meaning the revenues in the upcoming quarter is assumed to be 70% of the current order backlog. As I always say, this is not guiding. It's just an indication of how the timing of the existing orders will be when it comes to delivery for those of you that want to model us on a quarterly basis. TOMRA Food, 3% growth, so it's more modest top line growth on Collection and TRM, but we should remember that Food did not have the same negative development last year that we saw in the other divisions. It actually had 15% currency adjusted growth, third quarter '20 versus third quarter '19. So that explains maybe that the growth is not that high this quarter. Conversion ratio ended at 72%, slightly above the 70% that we indicated 1 quarter ago. Margin almost unchanged and strong good cost control. It gives almost identical EBITA NOK 104 million versus NOK 103 million currency adjusted last year. And then looking at the order situation, it's to a large extent, the same picture that we see in recycling mining, good order intake growth of 28% and good order backlog growth that of 42%. The conversion ratio in this segment is assumed to be 75%. Balance sheet. If we compare end third quarter '21 versus end quarter '20, there is a 6%, 7% currency effect, meaning the NOK is stronger now than then, which explains some of the deviations keeping them out. You will see a slightly increase in the receivables and inventory mirroring higher activity level. But you also see an even higher increase in accounts payable contract liabilities and other noninterest-bearing debt, which more than offset this. So consequently, we have a lower working capital, and that also explains the good cash flow that we continue to see, where we in the quarter report NOK 596 million on cash flow from operations, up from NOK 432 million last year. So with the good cash flow and reduction in working capital, good profits the equity is, of course, increasing now at 51%. And we have a low gearing of 0.3x IFRS 16 and 0.7, including IFRS 16. Yes. And then we have a solid position. As I said, there's not that much interest bearing debt out there, but there are some bonds that mature and are due date next year. So we need to start to looking to refinancing. So no decisions made, but it's likely that we will consider all forward bond plan and continue with bonds and it also are good reasons to believe that we look into green bonds or a similar type of financing. But we will come back to that in due time. Then we'll leave the stage for Georgiana, who can tell us a little about the taxonomy status in TOMRA.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Espen. Yes, we have done a preliminary assessment of TOMRA's activities with regard to the EU taxonomy. In short, the EU taxonomy sets framework for defining environmentally sustainable activities. For this purpose, there have been defined 6 objectives, which are listed on the right side of the slide. But only the first 2 have been detailed in the sense of technical screening criteria and the requirements that have to be fulfilled by activities to be defined as taxonomy aligned. Out of the 2, climate change mitigation is especially relevant to TOMRA with activities such as collection and transport of nonhazardous waste in source aggregated fractions and material recovery from nonhazardous waste. Another objective which is relevant, is a transition to a circular economy. But for this objective, we have only draft criteria that have been published. However, we see activities such as the one listed on the slide, the manufacture of machinery, enabling closed-loop systems and high-quality waste collection and waste management as being attached to such an objective. So based on the information that is available so far, we have estimated that about 60% of TOMRA's activities by revenue. So 60% of the group revenue is likely to be taxonomy aligned. The remaining 40% that is food sorting and the mining business. I hope this helps give a picture of what is our perspective when it comes to the EU taxonomy so far. Yes, back to you, Espen.

[Espen Gundersen, Deputy CEO & CFO]

Thank you. And it's time to talk about the future. Starting with Collection, we have had some really good quarters now driven by Netherlands. Also the introduction on small plastic bottles. Germany, driven by new requirements on security mark. Northern Europe, driven by R1. Going forward, if you think about fourth quarter year-over-year, Slovakia will be a good contributor as it was in the third quarter. Netherlands, as I mentioned, will go down because they were in the race fourth quarter last year will not be this year. Germany will probably be slower because of more limited effect from the security mark leader. Australia, probably a little up because of the remaining bottles coming back. And beside that fourth quarter, it's usually a little hard to predict because you sometimes get these rush orders many retailers has their budgets, and it's been a good year for the retail industry. So you sometimes get these orders in December for not delivery, but at least -- or installation, but at least for delivery because they want to use their investment budget. So it's always little uncertainty around fourth quarter, how it turns out. So there are some negatives and some positives into fourth quarter here. Going into next year, it's very much about timing. There are many very promising projects in pipeline. Tove showed some of them. On other deposit initiatives that is close in time. So also second half of '22 and in particular, '23 could turn out to be very good. First half '22 might be somewhat slower. Latvia will have commencement first February '22, but that's a tripod market. So the volumes will come more over time. So we don't get this onetime effect related to the installation. So we just have to look and see how this develops as the quarter moves by. But we need to prepare ourself and continue to build the organization for meeting these opportunities. So the operating expenses will increase and OpEx increases of 10% or north of that would probably be seen in the coming quarters for the reasons mentioned. We also get effects from going out of COVID, start traveling and start the engine again in some areas that -- for all business divisions would have an impact. If you look at Recycling Mining, with the indicated conversion ratio, we have a strong quarter coming up. We are internally optimistic on the outlook. There are many macro drivers that's driving in our favor also on the legislative side. So going into and through '22, we are optimistic on the outlook in general. Also, in Food, we indicate growth and the optimism remains. The COVID situation will -- could still have some influence and still traveling is somewhat challenging, the fears that we had upon are not really completely back, but we are getting there, and this will also help us in a positive way. The component situation will continue to be a challenge. I think -- I don't think anyone in the technology company with their hand on their heart can say that they have full control of the situation because you have long value chains, and you are depending for your suppliers, which have their sub-suppliers. And there are always a battle to manage, to maintain activity and don't have disruptions related to shortages. I think TOMRA's benefits so far has been a combination being big enough to really have the capacity to reengineer and redesign when needed based upon what's available. But at the same time, not being so big that you need really millions of components. So it's easier to get the volumes through different channels. So, so far, we have been managed and weathered this storm well and not goods, but we still need to continue to emphasize that this is a moving target and will continue to create challenges for us and similar industries in quarters to come. And on currency, we continue throughout fourth quarter to see at least so far stronger kroner and that will also have a negative impact on the reported performance, as you know. That was the outlook. I have some short personal announcement to do also, as you probably have seen in the report. I have been working for TOMRA for 22 years now. Soon 20 years as a CFO. And all good things must 1 day come to an end. It's never a perfect time to leave, but you should not leave during crisis. And I definitely don't feel that we are in a crisis situation. We have control. We have a very promising future, a lot of opportunities in front of us. So maybe this is a better time than other times. And we should also have respect that it's going to be extremely busy going forward. So this position is definitely not a retirement position. And getting someone in at this time with fresh eyes and getting a new perspective upon things could also I think it is meaningful. So I consequently informed Tove and the Board that I'm considering stepping down next year. It's very important for me to emphasize that this has nothing to do with Tove's arrival. I have had the privilege to work with her for 2 months now. And she really has the relevant experience. She is extremely bright. She is well received both within management and among the employees, leaving our values a really good ambassador for TOMRA. And she's the right person at the right time, and I'm confident that we have the right CEO going forward. So -- but despite this, I'm -- will -- I have informed the Board and Tove and understand they have initiated process to -- or will initiate the process to find my successor and start to look internally, externally. I am committed to stay as long as needed until this new person is appointed and onboarded and making sure that this will be a success, both for my successor, for Tove and for TOMRA.

[Tove Andersen, President & CEO]

Thank you, Espen. I, of course, really regret that Espen has made this decision. Espen has been crucial for TOMRA for many, many years. And I had really a pleasure working with Espen the last 2 months, and I couldn't have wished for a better onboarding. But at the same time, I do understand and respect his decision. And I do really appreciate that Espen gives us now the time that we can really run a thorough process to find a successor and that it gives us -- and will be available for us to ensure that we have stability in the transitional phase and also training the new person when we have selected that. So yes, we'll then kick off a search both looking internally and externally. And I do look forward, you still have Espen around for quite some time. So this will not be a farewell speech now. So I think we'll leave at that, and then we'll start on the Q&A.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Tove. We have a number of questions that have come in. [Operator Instructions] So let's kick off. The first question is from Fabian Jorgensen from Carnegie. Have you received any substantial orders related to the bottle bill expansion in Connecticut stating that all retail locations above 7,000 square feet must have RVMs.

[Espen Gundersen, Deputy CEO & CFO]

We -- Connecticut is a new market or it is an old market, but it has revitalized its deposit system. And as Tove mentioned, this is one of the opportunities in U.S. we see because of increased deposits going from NOK 0.05 to NOK 0.10 more type of bottled materials are coming into the system. And there's also a requirement for also the smaller stores to take back empties now. So this has generated some opportunities already. So yes, we have orders, but it's mainly for the smaller machines for the convenience segment, which currently to a more limited extent, has automated their return.

[Georgiana Radulescu, Director of Investor Relations]

Thank you. We move on to the next question from Daniel Haugland from ABG. You seem slightly more cautious with regards to supply chain issues and component shortage now compared to Q2. Can you please talk a little bit about, for which components are you seeing risks?

[Espen Gundersen, Deputy CEO & CFO]

I think you see that's mining commodity it's, of course, the semiconductors are probably the most eminent one, but you have it for passives, you have it for connectors. There are many parts that that's an allocation when you talk to suppliers here. So I don't think it's very different in our situation than other technology companies. But that it's -- the challenge is that you can sit on firm orders, but you can also experience to get cancellation on things because they don't manage to deliver on this and that is just something we have to live it and the industry as such.

[Georgiana Radulescu, Director of Investor Relations]

The next question is also from Daniel from ABG. Incredibly strong momentum in Europe ex Nordic. Can you give some flavor of how much of this is driven by new DRS markets, including the Netherlands, which boosted Q1 and Q2? And how much is driven by existing legacy markets?

[Espen Gundersen, Deputy CEO & CFO]

I think I'd answered rather concrete on that one during the presentation. The deviation between last year and this year is explained by Germany and Slovakia Netherlands was plus/minus 0. And if you assume that Germany and Slovakia had more or less equal part of the deviation, I think you have a rather exact figure actually.

[Georgiana Radulescu, Director of Investor Relations]

The next question is from Ole Bang-Andreasen from Tower House Partners. What is driving the U.S. growth in recycling mining ignoring the easy comparables?

[Espen Gundersen, Deputy CEO & CFO]

I think one should be a little cautious and draw conclusion just upon quarterly development. It's little dependent when you deliver orders. So in the sorting units, you often see that it can fluctuate little bit. That said, we have a good distributor in U.S. But we also have established ourselves in U.S. to gain more momentum through all channels. And in parallel, that it started to generate additional growth. So I think that is also part of the explanation why we see more orders from U.S. now.

[Georgiana Radulescu, Director of Investor Relations]

The next question is from Fabian Jorgensen from Carnegie. How do you believe food demand will develop in the short, medium term given the increasing ammonia prices?

[Tove Andersen, President & CEO]

Yes. So as we said -- or I said during the presentation, we see a good momentum within the Food division driving the investments. And then, of course, you have short-term issues now, and that has been driven by high crop prices and good demand. Of course, we now see short-term issues related to significant increase in ammonia and fertilizer prices. But that is believed to be short term and also what we know from previous situations like that, that actually food production and food demand is fairly robust to these kind of changes. So we believe overall that longer term, the food demand will increase with 1% to 2%. But what is more important for us is the growth of the automation which we believe will be around 6% to 8% going forward. And we don't see these short-term spikes in ammonia really impacting that long-term view.

[Georgiana Radulescu, Director of Investor Relations]

Thank you, Tove. We don't have more questions, but we have 1 message that has come through it is from Paolo from Tower House Partners. Espen, I had the opportunity to meet you and it was nice to interact with you. You leave a company with a fantastic personal track record.

[Espen Gundersen, Deputy CEO & CFO]

Thank you, Paolo. I love you too.

[Tove Andersen, President & CEO]

That was a very nice way to end the Q&A.

[Georgiana Radulescu, Director of Investor Relations]

It's a very nice way to end the Q&A.