Tomra Systems ASA

OSE:TOM

Earnings Call Transcript 2018-Q4

[Stefan Ranstrand, President & CEO]

Good morning. My name is Stefan Ranstrand. I have the privilege to be heading TOMRA Group. I'm here today together with Espen Gundersen; and Bing to present our 2018 and fourth quarter '18 results. If we look into 2018 of TOMRA, we have an exciting year behind. We have seen actually very good momentum in the recycling business. If we look into the whole world, there's a lot of material being recycled. China, in the beginning of the year, decided that they will no longer become the waste dump of the world. [Presentation] We are making a rehearsal here. Actually, I recorded this yesterday. So what do they call that, playback or what they call it. So you have the right to get your money back for your tickets. So I don't know if I should restart, but I do restart very shortly. Very nice to be seeing you all. Thank you for coming and thank you for attending. Espen Gundersen, Bing and myself, Stefan Ranstrand would like to present TOMRA's fourth quarter and 2018 results. 2018 was an exciting year for us. We had good momentum in recycling. You might recall that in the beginning of the year, China said we will no longer be the waste dump of the world. They put up a regulation, which they call National Sword and that led to that countries that until now have been exporting their plastic or their waste into China, no longer could do so. And you see the mountains growing of waste because they could no longer export it, and we also in result of that. So a very strong demand for sorting equipment, which is not a short-term story that will actually continue, but we just saw that increase in 2018. And we see that some other markets are coming in where they are actually exporting instead of to China into Malaysia, into some other like Indonesia and so on, and these countries themselves are trying to put up a ban on this because it is not right to export waste. It's an opportunity actually to make local use of it and create green jobs. But that's not part of the story here. I just want to say that we had a good momentum in recycling, and we probably expect to be continuing experiencing good business in that environment. We also saw a lot of discussions, fairly new for us when it comes to new deposit markets. Actually, Espen talks about the tsunami, I rather talk about surf wave here because tsunami is a little bit -- have negative effects, and so if we can be quite sunny and nice. We think that, that is something really exciting. We'll talk shortly about the most pleasant ones shortly. In the food, we experienced a solid market situation. We expect food to be less event-driven. It is a steady continuous growing business as the world needs more food, as there is a need for automation because of cost of labor, shortage of labor and in some markets, actually, you have no alternative. If you take a country like China, as using an example, they have a lot of people working in the farming sector, predominantly old people, very manual farming work and food processing work. And as most of the young people are actually moving into the cities, it remains with the older generation to produce the food. China being the food producer and food consumer in the world, they need to solve that. Automation is part of the solution here. So we think that not only in China, but this is a continuous good business. And they are looking for the need to automate to replace people and also need to bring quality assurance and that's exactly what we contribute with our solutions. Further to that, in 2018, we did get the opportunity to acquire BBC Technologies, a New Zealand-based company, focusing on predominantly blueberries. They are #1 in the world, but also doing some sorting of cherries and cherry tomatoes, a really fine company. We are very proud owners of them, and they have not disappointed us so far. We're also very excited about them in the future. We thought it to that in November last year, had the opportunity to enter into Queensland with 10 sites for -- in line with their new deposit system. It's quite a different system to that which we have experienced in New South Wales. But nevertheless, we got 10 sites, and we are happy with the start phase there. It went flawlessly, so I'm very proud of the team that we have the ability to also serve the market, which is really on the other side of the world, go in, start-up on a date with a new solution because all of them are somewhat different. It doesn't look like in Germany. It's somewhat different setup, but the team is geared up to engineer solution, bring it to shore, install it and turn it on on time. It's quite magical. Very, very proud moment for us all. And we had a full year for the first time of Queensland. So Queensland -- sorry, New South Wales. New South Wales, we commenced 1st of December in '17. So '18 was a full year. Within the first 12 months, we collected more than 1 billion objects. So quite an achievement. Many of these objects would otherwise have ended up in the oceans, in the land, but now people see this as a good option, and we have throughout very positive feedback. It was a little bit grumpy in the beginning because of delays. For us, the challenge was really to get sites where we could put our machines, but once we came over that, once we've got the system working, it's well recognized by the politician, by municipalities and by the public, and we are very pleased with that. It's well in line with our expectations, actually exceeding it's likely. So it's a good start for us there. So it's good to see that we have the ability to do this kind of if I call them exotic products, they are in way, not exotic, but they are far away, and it's a new market and I'm really proud of -- that our team has the ability to do that. Looking at 2018 further, some big topics affecting TOMRA, plastic oceans. We are swimming in plastic more and more. And one way, our way to contribute to solving that problem is to reduce the inflow of plastic. We do not intend to clean up the ocean, we don't have the technology to do that. But by collecting plastic material, we can prevent it from entering into the ocean and that is our approach to it, and that's how we also see our business contributing to a major mega problem. We also had a lot of discussions on ban on single-use plastic, on political level, on European Union level, and we see effects of that. I would talk shortly about that. Circular economy is a topic which we see more and more every day, going really from linear where you consume through a -- what you say consume and reuse or reduce, reuse, recycle. And that's spot-on where we want to go. And European Union came out with a very clear indication of what they understand as single-use plastic directive. I'll talk about that shortly, but it largely affects TOMRA. We also had a Capital Markets Day where we clearly staked out our future. TOMRA is swimming in on 2 main areas: one is circular economy. The other one is future food. That's not in any way a disconnect to the past because the solutions we have from the past will be the only future, and present and future and they support these megatrends. So I hope you felt that, that was a logical extension to where we want to go, but that's slightly is what we say, this is what -- is what TOMRA looks like in 2030. So if we look into -- if you don't listen to me to so much, let's look at the results. So for the year, we had 16% growth. Of course, there were acquisition elements in that. So adjusted for that, 11% growth in revenues for TOMRA Group. 9% in Collection and 14% in Sorting Solutions. So quite good year in that regard. Also the earnings went up in a nice way. So we can see that we are a growing company, which have been growing now steadily year-on-year for quite a long time and that goes in most dimensions. I will not go further into the financials because Espen will soon take them. Let me just talk shortly about the fourth quarter. Also, a good ending of the year for us. We feel happy with the revenue of 21%. No particular events, except for maybe that Queensland actually went live in the quarter, but beyond that, no particular events. We see continuous good momentum. Recycling was a little bit slower in the quarter, but there's no indication for slow down that was just how it distributes over the quarters. But all in all, stable and good, so we are very happy with that. Looking into the European Union, single-use plastic directive. This is important. So European Union actually is the most prominent political body here in the world, I would say. It's going out and saying by 2025, 25% of all PET bottles will be built on recycle content. So they will use recycle content when they make new bottles, 25% out of them. And by 2030, 30% of all plastic bottles should contain recycle content. That's very, very important. It's not only telling that we need to collect the material, we also need to reuse it. That will enforce the industry to really look into how they design the products, and we need to build up the systems for enabling this.And for TOMRA, that means good opportunities. I cannot guarantee anything, but we see good opportunities both in terms of collecting because by collecting number one, you get hold of the material, which is very important in order to recycle it; number two, you get hold of the material in a good-quality way; and number three, you actually have visibility on to what you get hold, so that the downstream know what's coming in here. If you think of a traditional waste management, a lot of waste is coming in, but it's very unstructured. You don't know the quality, you don't know the quantity et cetera, but such a system is very precise. And we know that by experience because our machines to 65%, 70% are actually connected, so we know exactly what's happening on the instant. So that's very important. Secondly, they're talking collection targets, 77% by 2025 that is what should be collected of all the plastic bottles and 90% by 2029. In our world, we don't think that this is possible unless you have a deposit system, but we will see what comes as proposed so -- but we think this is very positive indication for the industry. And further to that, talking about the extended producer responsibility. It's a very important element. It costs money to take back waste and the extended producer responsibility should help that. And they also talk about cross-collaboration which I touched on before, which is a very important element to really make this shift from a linear to a circular economy. The whole industry must work together. What's working good today is the front end, the collection and the recycling, but also these consumer goods-producing companies or bottle-producing companies need to adapt their process and say until now we either use value material predominantly, now they need to design the processes in a way that they can take recycle material. But then, of course, the industry also need to guarantee the quality and the quantity at a given time. So it's a system that needs to be put in place. We have the know how to do that. We are very eager to do that, and we look forward to contribute to realizing such a system for European Union, and I hope that will also be some kind of a motivation for other parts of the world. So in addition to that, there will be some product bans, which is very logical like think of it, the plastic is fantastic material. It's designed for several hundred years of usage and then you have a plastic straw, which you might use for 10 seconds for a drink or a minute for a drink depending on how eager you are or thirsty you are, and or tops -- the ear tops with the plastic bar in the middle there. It's not needed. You can actually find replacement for things like that and they are addressing that, which is totally right. That is not so relevant for our business case, but it's a good initiative in the totality. With that, I think I should hand over to Espen to give you some more fundament into the numbers.

[Espen Gundersen, Deputy CEO & CFO]

Thank you, Stefan. First, as always quick look at the currencies comparing fourth quarter in '18 versus '17, we see a rather flat euro, but a stronger U.S. dollar, both versus Norwegian krone versus euro, which is a positive for sorting. On collection, we also have a lot of dollar costs, so it's more neutral on bottom line in collection. Financial highlights. Strong quarter, all-time high revenue, not only on group, but also for both collection or sorting isolated, plus 14% and plus 17%, respectively. The margin is stable in both of this units, mainly the gross margin. Operating expenses is increasing because of higher activity in both business areas and also there's some inorganic from BBC. But bottom line, EBITA NOK 396 million, is up 32% from last year. Looking at balance sheet, cash flows measuring the year and currencies, we also have the same effect where the dollar has strengthened around 6% and euro more flattish, 1% up mainly end of 2017 versus end of 2018. So the balance sheet has expanded somewhat due to currencies.Looking at the line items. In addition, you will see that starting from the top, intangible assets has increased because of the BBC acquisition. And the tangible noncurrent assets what we called -- previously called fixed assets has increased because of further expansion in New South Wales, Queensland and some extent, also some redemption centers, some of the recovery activity in the U.S. Inventory and receivables has increased, so has also noninterest-bearing liabilities, meaning mainly accounts payables, but the net of them has also increased bearing higher working capital today than we had previously, again, a consequence of higher activity. So the interest-bearing liability has increased somewhat because we have almost, but not entirely, managed to finance both the -- compared to the BBC acquisition, New South Wales, Queensland and the dividend, the true cash flow from operations. So talking about cash flows. We came in almost identical to last year and the year before. So we're rather strong cash flow even though we have expanded somewhat on our working capital, but we clearly throughout fourth quarter compared to last year. But solidarity and gearing is -- solidarity solid and then the gearing is low. We will implement IFRS 16 starting first quarter this year and estimated effect, meaning the total balance sheet is assumed to increase with little south of NOK 1.2 billion. It's mainly land or property and vehicles, which you have to put into the balance sheet. So the final figure will be announced together with the first quarter report. Dividend. TOMRA had for the last 8 years, been living under a regime where we pay out 40% to 60% of the earnings per share in the dividend. So looking at the top left graph, you see that we have been within this band. This one is expressed in the absolute figures, on the top right is in percentage. We also, and this can be done because we have rather low gearing. It was 5 years ago around 1.5, now it's staying below 1 for several years even though during the last 2 years has acquired -- Compac acquired BBC, invested in New South Wales, invested in Queensland. We still have a low gearing. And as I said, equity is solid, north of 50%. So TOMRA did significant recurring revenue, strong balance sheet could take upon significantly, more debt than we do today. Even now for national strategy, we say that we should maintain investment grade to find us achieve at least BBB- on S&P's rating system. We are not rated and not plan to be rated, but banks tell us today that they look us, TOMRA as A-. So if you accept that, a lease can take 3x interest-bearing debt or EBITA, or as debt and maintain investment grade. There is -- at today's run-rate, room for take up NOK 3 billion more of interest-bearing debt. And I personally believe at least in ramp-up period, we can go slightly above 3 also. So at the same time, there are significant opportunities out there, as you know. And some of them needs TOMRA to invest also. But the timing of this and what role TOMRA will play and what kind of systems that we will see materialize is, of course, somewhat uncertain. So what we see is that within the next 12 to 24 months, it's unlikely that we will not manage to execute upon the bounce opportunities with the strength we have in the balance sheet and under the gearing opportunities we have stand-alone. For that reason, we feel it's right to give out some extra dividend now. In the long term, let's see what's happening. I hope that if everything materialized in a positive forward way for us, and we will need to invest in some of these models. We will also be allowed to go back to the shareholders because we have that status proven that we continue to manage to provide a decent return on these projects, but that's not likely within the next 12 to 24 months. For that reason, we paid out additional NOK 2 on the top of NOK 2.50 as an ordinary dividend at the last annual general meeting, assuming they will approve the board suggestion. With that, we leave the stage for Stefan on Collection Solutions.

[Stefan Ranstrand, President & CEO]

Thank you, Espen. So yes, we are in a situation where we are growing in both businesses. Collection Solutions traditionally had not been grown so much. We have been experiencing now more new markets coming on board. We had also in the period '15 to '18, we had a replacement in Germany. We see that, that cycle now is towards an end, maybe even '17 and '18 was already kind of a new normal. We think something like that will be the new normal in Germany, so what we have seen in '17 and '18 in Germany, we had a very high spike, if I say so in '15 and '16 actually grow 35%, '14 to '15, so that was a strong growth for the whole business and Germany more on top of that. And of course, we are very pleased because that was a big project for us. We launched a new technology that could have failed. We got a lot of replacement opportunities in the market, and it seems we time very well to capitalize on that. So we were a bit overwhelmed when that started. It came more in the beginning than we had expected, but if I look in the mirror from now, looking back, I'm very pleased. We got -- we could expand our market share. We got our new technology both working and embraced by the market. So great period. But there is no further drive for growth from Germany as such. We think it's still a stable market, but rather now on the new normal, so that's what I wanted to have said here. And if I look into the last quarter, we had modest growth in all traditional markets. So modest growth in local currencies in northern or in Europe and modest growth in North America, so that's good. And the drive of growth is coming predominantly then from new markets. In this case, New South Wales contributed to growth because it was the first full year, and then towards the end of the year, we got a little bit support also from Queensland. So such a market like Queensland, New South Wales, it takes some time until they are fully -- the full utilization of the system, even we might have all the machines out there, but there will be a steady growth as more and more consumer embrace the new system. That's our experience. So that will be a positive for us going forward as well. But also remember, we are investing quite a lot in our businesses, both in Sorting and in Collection. It doesn't come for free to go into these new markets. We have to prepare quite a long time. We might need to do some adaptations of product design, which we have done in both New South Wales and Queensland, and we might also need to reengineer our production systems at the time. So it doesn't come for free. This growth also drive some operating expenses, but I think everyone who has experience in the business understand that's a natural. But looking at it, we had a 14% growth in the quarter in Collection, which is nice. And I think all corresponding numbers are falling through in a good way, and I let Espen take the numbers later on. Rather, I focus a little bit more on some of the markets we are zooming in on. As I said before, in wake of the European Union, in wake of plastic ocean, there is more momentum into deposit markets. Western Australia is maybe the most advanced one here. They are in a process where they are evaluating the new system here, and we expect to get some feedback on where they are heading fairly soon here, but they are in a very final stage. Will be exciting to see whether they will lean towards the Queensland system more or towards the New South Wales system more. We are, of course, experiencing both of them and I don't want to give an opinion of which one is the better one. Queensland is fairly new, so we don't have much experience, but we are ready to serve if it would go in any of these directions. Scotland has been clear that they want to introduce the deposit systems since some time. And they have had a consultation period that has ended. What is next that we'll be looking at there, it was -- will be their recommendation of the consultation period. And that is something we are actually expecting any time now. So that should come here fairly soon to see what do they decide after that consultation period. But they are clear. They want to go ahead. They are not waiting for England. So it's a positive, and we're expecting there somewhere around 2020, 2021 that, that system will go live. Portugal has come a little bit like rising star from the blue sky like they do in soccer. They're good there too. And they have given us some kind of indication that there is a low in place and they want to do something. They have instructed retail to prepare for making pilots and they want to proceed with that. So that's really a positive development for us. And of course, we are supporting and geared up to support that too. Potentially 2022, we think could be a system there and then we have England, which has been on the agenda for quite some time now. They have delayed the system. Originally it was at 2021, now it's at 2023, but then they have also affirmed the system. So we are pretty sure will come, and they now has launched their consultation process, which is a logical step in such a evolution. And that should take 12 weeks if I'm rightly informed. So after the 12 weeks, they will close the consultation. They will go in and do their evaluation and then hopefully, we will see some outcome of that. And when we say England here that include -- includes also Wales and Northern Ireland. So that is the definition in this case. So I think that's exciting more than we have had in the past and these are more concrete ones. Of course, the other countries in European Union and abroad that are looking into this, but these are the ones we think is worth talking about at this stage. With that, let's look into how that business has performed financially, Espen.

[Espen Gundersen, Deputy CEO & CFO]

Thank you. Yes. Quick look at the figures. As I said, all-time high revenues is actually stronger than we had back in the best quarters when we had the German replacement price in '15 and '16. The contribution for growth is, of course, Australia, which is reported on rest of the world and also to some extent, the U.S. has performed good the last quarter. The margins are maintained stable and OpEx is slightly increasing last year, meaning fourth quarter '17, we had extraordinary costs related to New South Wales ramp up. This year, we had the ordinary running expenses from New South Wales, Queensland ramp up and also general ramp up on top of this that's -- this element equals out more or less. That was the collection figure and then we are going over to sorting.

[Stefan Ranstrand, President & CEO]

So since we know that collection is a business that is more tied to deposit markets, there's still no such limitation on sorting. So we have installations in about 80 countries. We have more than 10,000 sorters. We are active in recycling, in mining and in food. We have experienced very strong momentum in recycling. We have experienced very strong momentum in mining. We have experienced good momentum in food. As I said before, food is less event-driven, mining is more cyclical and recycling is really capitalizing on this plastic ocean, National Sword events, which I mentioned about it before. In the extension that will also transform into a new sector demand for recycling because when the consumer goods companies say we will use recycled material, like we saw in the European Union directive, well then, we will have more need for sorters, again, because then it's really about making a very fine product. It's -- plastic being a commodity or a resource that is in unstructured form not really usable, but to be able to deliver a very defined specification, over time that is the job and there that you cannot do without the sorters because you cannot even see with a human eye the difference between certain different plastics. They might look the same to you, but our sorters will see the chemical differences between them. And in order to build that circular economy, that is a needed -- absolute needed function. So there will be an extension, a replacement from this National Sword-driven market, which we experience right now, there will be new market demand growing up here progressively over time. So we are very positive over the long-term outlook here. We also have a -- enjoy a very strong market position, north of 50%, well north of 50% globally. And we are well placed, I would say also when it comes to recycling in emerging markets, really well placed, so I'm happy with that. Food has a longer journey when it comes to emerging markets because our technologies are really developed and geared up towards the high -- really sophisticated process you find in North America and in Europe when it comes to food processing. When you go to emerging markets say China, India, you come from a complete different level, you come from very basic, very manual. So there would be a more gradual solutions, so for us, it will be the challenge, can we find the right solutions to support that evolution, but these are markets we're looking for. So there is no immediate end to the demand here. I don't see a short term, long term or medium or long term, there will not be no end in demand. The demand is there, and it's a very important sector. So we are pleased, I think we are well placed in all these 3, and the business is really has progressing very well, when Espen show you the financials later on, have a look at the long-term development here, how that has been growing. I think most of what you will see from TOMRA going forward will be organic. I do not exclude some acquisitions, but predominately organic. I feel we have a portfolio that is fit for what we want to do, and that's good. There's nothing really we need to divest and there is no big investments needed in that regard either. So we are fit. We can do a lot organically by our own developments or products, or solutions and by geographical expansion. It will drive some cost increases, but we also see that we are growing so and profitability-wise so too. So with that, I think I could -- I have already talked about the different sectors, so I pass over to you, Espen to sum up the financials around that.

[Espen Gundersen, Deputy CEO & CFO]

Yes. Strong revenue growth, by far the best quarter we have had in sorting. All major geographies are contributing and on business stream level, it's food and mining, which actually is the ones that contribute most to the growth this quarter. The gross margin is stable, despite somewhat negative product mix. The additional revenues helps on the margin side, even though most of the cost of goods sold in sorting is variable. There are some fixed elements also, so additional volume helps on the margin side. Operating expenses is increasing as a consequence of higher activity and preparations for the future. Looking at the order situation, we have as I said, strong revenue in fourth quarter, but since also the order intake was strong at 19% in the quarter, we also end the year with a healthy order backlog. I sometimes being asked about seasonality, and then looking at it, you see here that it's very typical fourth quarter with strong revenue, many customers want to complete their orders before year-end. At the same time, you also, so consequently, you see a lower order backlog at the end of the year than the usual another 3 quarters before. But looking at the order backlog, one should look 1 year back. That's the most relevant reference point in that respect. First quarter is usually somewhat lower and that's related to the food seasonality, where most of our activities in the northern hemisphere, and it's winter and the customers do not much -- want installations that much in that period. So and the all conversion ratio is assumed to be around 75%, meaning we believe today that the order -- that revenues for first quarter '19 will be 75% order backlog at the end of fourth quarter. This is not guiding, it's just an indication what else -- that are to model us.This was the past and then, quick look at the future. Starting with Collection. Overall, we expect base business to be stable. Germany significant market for us was stable '18 versus '17 after the replacement raise in '16 and '15, and we assume also going forward no significant changes in the activity in that region. So growth also for almost of the units. On top, you will see we get the full year New South Wales effect with the food installation and also Queensland, which is not in there for the first 3 quarters of 2018. So consequently, comparable figures will improve for that reason. So the rest business will be stable or slightly increasing. That's the top line. When it comes to gross margin, we don't expect any significant changes. OpEx is very dependent upon what opportunities we see in the market. As you know, we are ramping up the organization preparing for what is about to come and some of this OpEx is related to concrete project and the timing of those, as you know, is somewhat uncertain. But all in, I mean, sometimes ask about a figure. Let's assume that OpEx next year, very round figures will be NOK 100 million above '18, meaning '19 above '18 for the entire year. That's just an indication and let's see where we end up. On sorting side, I said 75% conversion ratio. And the momentum, in general, is good in that business area and OpEx is probably to be more in line with what we saw in the fourth quarter since we had the ramp up in fourth quarter, this might be not that much increase in the next quarter call. Also remember, currency so far in first quarter we have experienced strong dollar and compared to the first quarter last year, we consequently could assume some tailwind on the currency if that stays out the rest of February and into March. That concludes the presentation, and we open up for questions from the audience and from the web.

[Elisabet V. Sandnes, Senior VP & Head of Group Strategy]

Okay. I think we can start with a couple of questions from the web and then we can take the questions from the audience afterwards. So there's one question from [ Thomas Raeford ]. Can you quantify the numbers of countries that has been in contact with TOMRA regarding information for introducing a deposit scheme?

[Stefan Ranstrand, President & CEO]

Espen, you are better accounting than I am.

[Espen Gundersen, Deputy CEO & CFO]

Of course, TOMRA is to some extent a company that is viewed upon the competence, not only within deposit systems but more and more as kind of understanding the entire value chain and the circular economy element into this. So I think it's fair to say that we have delegations in Asker, at our headquarters every week from someone visiting us that want to understand better from all over the world. Where they come from, who they are, and so on I don't think it's right to announce here. And then having a delegation talking to us is not necessarily, the same as they're going to implement something that's could be a value to us, but it's definitely much more interest from all around from governments, from stakeholders, from people out there that want to understand and discuss with us. And this creates opportunities for TOMRA, and it illustrates that there are things happening out there that is hopefully, things we could monetize upon because the focus is completely different from what it was 3, 4 years ago. I don't think I can be more precise than that, but things are happening. Yes.

[Stefan Ranstrand, President & CEO]

Thank you, Espen. That's really precise mathematics.

[Elisabet V. Sandnes, Senior VP & Head of Group Strategy]

Okay. And then we take the next question, which is from Marcela Klang in Handelsbanken. Can you specify how big was the impact of the BBC acquisition on operating expenses this quarter? I guess, again, numbers.

[Espen Gundersen, Deputy CEO & CFO]

I think I'll just refer to disclosure Note 6 in the report, quarterly report. You'll find all the figures there. So just use that one.

[Elisabet V. Sandnes, Senior VP & Head of Group Strategy]

Next question from [ Pete Moon ]. How would you consider TOMRA collections possibilities in Turkey, Belarus and Jamaica, all mentioned in press recently?

[Stefan Ranstrand, President & CEO]

Yes. I think we have to see it the following way. There is both the situation of markets, which we have to evaluate because of the complexity simply. Take Turkey, it's a very vast economy, a very vast geography. And if we were to enter into that market, we have to think very carefully. Can we do that? Do we have the capability? Because one thing we have to say, if we go in we have to do it good. And that's how sort of say a quality stamp which we live up to. We should not go in if we don't think we can do a good job. And then, of course, it becomes what kind of model is it? Is it a sales model? So how do we then serve it? Is it an investment model? Do we feel that it is the right investment for us? So it's a long way to decide upon things like that. So I don't think it's one easy answering. In fact, that maybe illustrates that we will have more of this kind of questions going forward. In the past, it was pretty easy. Here comes the new deposit market. For sure, we jump on to that. In the future, there will be economies, which are simply we have to evaluate, prioritize or -- so can we do it in a good way, can we not do it in a good way, what is the requirement of the system? Does it require big developments of technology? Or do we have a plug-and-play solution for that? Is capital required for -- where we should own the install base. Do we feel that is right or not? And can we have people working there or do we have the competencies of the market? So I -- this is a very fluffy answer but I cannot give it more precise.

[Elisabet V. Sandnes, Senior VP & Head of Group Strategy]

Thank you, Stefan. And I think then we open up for questions from the audience.

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng from DNB Markets. I have two questions. One fairly easy and then one more difficult. Start with the difficult one. In the consultation periods that is currently ongoing and in different markets, do you have any feedback or thoughts you want to share on what the discussions are going through in types of -- in terms of bottle size, what will be included? If it would be returned to retail would it be lease markets and also what is competition doing? Secondly, the easier question is IFRS 16, I suppose give some indication on the P&L impact on lower -- sorry higher EBITA, higher depreciation, higher interest costs?

[Espen Gundersen, Deputy CEO & CFO]

Let me start with the easy one. And as I said we are somewhat south of NOK 1.2 billion in asset and liability, when the EPS effect will be 0. Or not material effect on the EPS, but there will be some effect between the line items. And I would assume that the monthly effect will be close to NOK 3 million between EBITA -- sorry, between operating expenses and finance items, meaning the EBITA will increase, improve and the finance will decrease for that effect. There will also be a significant effect on the cash flow because now the lease payments is taken out and being replaced mainly with down payments on loans. That figures I don't have exact figures for it yet, but it will be the same for country -- in companies implementing this. It is more kind of a reclassification. The cash flows in the bottom is the same, but the way you have to report, it will be slightly different. So that's hopefully, give you some indications on the IFRS 16 part. The other one was a very broad question. What the feedback and I don't know if you want to say?

[Stefan Ranstrand, President & CEO]

Yes, I can say a few words. But I mean, there is always some risks if we can speculate, and we prefer not to speculate to be honest with you. There will be facts on the table when the consultation is over. We can get some indications but they are also not proof. Like in England, might be that they will include more kind of a holistically system with many bottles and both for in -- at home consumption, for on-the-go consumption but again, exactly how that spills out and what that means in business, I rather prefer that we wait until we have the facts to be honest with you because we have also experienced in the past that the systems do not always come as we have thought. And when we have the proof in a pudding then we can decide what it means for us. So that is a very vague answer, but Espen, you are better at handling these questions than I am.

[Espen Gundersen, Deputy CEO & CFO]

No, no. I bet it's a relevant question and then it's -- you're pointing out those discussions, that goals on almost all markets. Where will the return be? Will it be inside the store, which will be the close proximity to the stores or will it be someone else. Who will own the machines? And how advanced will the system be? And will there be use of machines, how much use of machines will be? How high will the deposit rate be? High deposit meaning high return rate. The consumer for the consumers opening hours and also how broad will the system be when it comes to size of objects, type of objects, plastic aluminum, glass and also the contents were, so thus and so on and so forth. All these things are up for discussion. England is the biggest 1 now, which is kind of rather concrete because they have started the consultation period and they have describe 2 different versions here. But it seems like they have decided upon going broad, meaning all material types, it's being managed [indiscernible] which is a meaningful amount on the deposit. It seems like they want to have a convenient system with significant infrastructure in place where -- so people can easily return their empties. It's a discussion about size of objects, should have more to undergo or should it be a through system, and that's open for discussion and then let's see what comes out of that since it is so early in the process. But as Stefan said, it's 90 days consultation period. So a lot of stakeholders will probably announce their view upon this, but in general, it seems like they have an approach to this, which will end up with something that looks like a deposit system that we have seen other places and it seems they have a clear ambition from the government side, and that's a good start.

[Stefan Ranstrand, President & CEO]

When it comes to competition, I think we will see all players being very interested in a market like that.

[Espen Gundersen, Deputy CEO & CFO]

Absolutely.

[Knut Erik Løvstad, Equity Research Analyst]

Knut Erik Løvstad, Kepler Cheuvreux. In terms of the OpEx, last year you had the NOK 57 million ramp-up costs specifically related to Australia. You're indicating this year that the ramp-up costs or the additional costs, if we can call it that, is roughly of the same magnitude. Last year we saw that it was sort of more of a onetime event in 1 quarter. You seem to indicate now that we should expect the costs to be roughly NOK 100 million higher in '19 compared to '18. So I guess it's not sort of a onetime event anymore in this quarter. So should we expect now -- what is that higher cost? I mean, what actually are you doing in terms of sort of a continuous ramp-up? But at this stage, what are those cost elements?

[Espen Gundersen, Deputy CEO & CFO]

I mean, it's just not 1 element, it's several things. Some are market specific, but most of this currently is more general on the production side, on the logistic side or sourcing in general. It's on R&D. And its market intelligence, governmental affairs and the business development resources. I think personally, as we were being challenged, is it possible to ramp up quickly on the production logistics, and of course, I see the challenges. But that's maybe not my biggest concern because I think that is something we can deal with if we just plan properly. But this is having all the resources, the competence, having the dialogues with the markets, establish ourselves in new markets, having the people are on the ground that has done this before and have the competence how to build deposit systems. So it's about skilled people to being out in the markets. That's maybe the biggest challenge and this is something you have to invest upfront also. So it's the total of, several things. So so far it's not that much market specific, but that will come as we go going forward here. So maybe not a very precise answer, but it hopefully gives you a reflection upon what we're doing.

[Stefan Ranstrand, President & CEO]

Let me, I think the answer is here. I just want to make it a little bit more clear. So let's say there are 5 markets now, within the European Union, that are looking to potentially introduce a deposit as the result of the European Union single-use plastic directive. Now what does it mean for us? Well, we need to be there, we need to be there to consult with the governments. We need to be there to talk to the relevant stakeholders like retailers and so on. So we need to actually establish a team of a number of people, not huge, but a team. It might also be new requirements out of that market saying that well, if we want to serve that market, we have to have this and this, specific features in our products. It might not be a completely new product, but taking New South Wales, we're using PayPal. That was a new feature, which we haven't used in the past. I just give it as an example. So there will be product adaptations or product developments. There will be this consultation. And then, of course, if we then think that we will have to produce more in the future, we also need to ramp up the supply chain from suppliers, making sure that we have sufficient capacity, maybe a backup source, our own production capacity. Are we fit for that? We need to employ people as we go. Look, New South Wales, actually we have, I think, I hope I'm not revealing something I'm not allowed to, but he will tell me afterwards. We have about 100 people in New South Wales operating. And to get such a market up and running in a short time, that is an investment. Now that was an extreme case because it went very quickly, but I hope it illustrates to you that growth doesn't come for free. We need to invest in that. And since we are seeing so much now here in the horizon, we actually need to have a number of parallel processes and we are investing. We are ready to invest in that growth. And we think that if you don't do it this way, we might get a good result, but we might not get the same quality and we want to make a good quality system. We were to contribute to a good society like we have seen in Lithuania and New South Wales and I think also in Queensland where we say when we go in, it's a good system. It's a Tomra system.

[Knut Erik Løvstad, Equity Research Analyst]

If I can follow up on the growth we're seeing, the consultation period being started already in the U.K. or in England, for a possible introduction of deposit system in 2023. The EU target is 77% by 2025. You would expect then that perhaps some of these other markets will have to sort of look at this now very, very concrete, if you will. What are the initiatives that have been taken in France, Italy, Spain, some of those larger populated areas in Europe?

[Stefan Ranstrand, President & CEO]

I think we just mentioned it. On our side, initiatives is that we are building up an organization to support the processes locally envisioning that they will come. So that is. And then level a consultation on different markets. I think Espen was into that before. It's a broad range, but for sure, there are more activities. So please accept that that is the nature. It doesn't come for free.

[Espen Gundersen, Deputy CEO & CFO]

I think all markets are to some way looking into this because everyone else is coming and they have to fulfill these new obligations and no one is compliant with this now. And now we are opinion on the way to get to the 70% side and then to 90% is through deposits. So all markets, they are not kind of -- some are confirmed and on order, but everyone are somewhat looking into this and that's what is making it exciting, but also challenging because each country will have their own process and the solutions will not be the same all over. They will choose their own way to meet these targets and how to collect the material. So, but we will obviously try to be present for various activity.

[Stefan Ranstrand, President & CEO]

And of course, it turns up for us as operating expenses, it's not an investment. In a way, you could use as an investment. We had to invest in operating expenses to be ready to serve these markets. I hope that is giving somewhat an understanding. But we see this as fairly safe investments. I mean, it's not like maybe something it's coming. We think this is really going to happen at one stage or another in the market, so we see it would be a mistake from our side if you were not investing in the opportunities.

[Knut Erik Løvstad, Equity Research Analyst]

No, I think they understand that. It was more sort of what is actually happening in some of those larger countries. At what stage are they discussing, given that England is already in the consultation phase in a way and it's going to start in 2023. For most of the other countries to be open, ready and to achieve 77% by 2025, they probably will have to have a system in place '24 maybe, and then you would think that they would have to start a consultation period fairly soon as well. Is that sort of happening? Do you see that -- those types of discussions in these markets?

[Stefan Ranstrand, President & CEO]

We see the discussions happening. They might not have come to consultation. You know they're European Union -- single-use plastic directive is fairly new, it's not even hammered fully, right? It's not by law yet.

[Espen Gundersen, Deputy CEO & CFO]

Yes. It's a ratification that remains, which is a formality.

[Stefan Ranstrand, President & CEO]

Exactly, so it's very new.

[Mikkel Nyholt]

Mikkel Nyholt, Carnegie. First a question on Queensland. Given that you had 2 months of operation now, are you able to say anything about the revenue? And hopefully, the EBITA from that region and eventually what you are expecting for the coming months. I assume that you're also there, as in New South Wales, are in a ramp-up period where you're not -- you don't see full volumes already.

[Espen Gundersen, Deputy CEO & CFO]

Yes. We said initially, very, very, very broad figures that we will invest NOK 50 million and get NOK 50 million revenue out of Queensland, and we're on track on that. And I think I'm not prepared to be more precise than that.

[Mikkel Nyholt]

All right. Second question then. On the margin in Sorting Solutions. For myself, I'd expected a slightly higher margin this quarter i.e. -- but are you able to say anything about the increase in the operating costs? Is it all related to ramp up and positioning? Or has there been any, call it, underlying increases from other cost factors?

[Espen Gundersen, Deputy CEO & CFO]

No. I think it is a sum of several things, but it's partly about delivering the all-time high revenue they have in this quarter, but it is mainly about preparing for the future. So also for that reason, I said that going into first quarter, I think the level we are at now will not increase significantly from that, but that's to some extent a level you can expect going forward.

[Mikkel Nyholt]

All right. I follow your comment on OpEx is -- or revenues also drives OpEx, but coming from a situation where you've said that typically the OpEx is flat and that you'll have a higher degree of operational leverage, therefore, my question.

[Espen Gundersen, Deputy CEO & CFO]

To just elaborate on it, I think if you go to -- when you see the disclosure note on -- I think it's #10 in the annual report, it's unreleased, you can see how much we use on R&D and you will see at least it was accounted for there. It's NOK 100 million increase in R&D in the group in '19 versus '18. And that explains also partly OpEx increases. So it's also investments for the future. .

[Mikkel Nyholt]

Last one. I was slightly puzzled by the geographical split in the revenues in Collection Solutions. I was surprised by the level in Europe. Is all that related to Germany? Or -- so there are other countries there with growth then this quarter?

[Stefan Ranstrand, President & CEO]

Go ahead.

[Espen Gundersen, Deputy CEO & CFO]

That region comprise Austria, Netherlands, Belgium, which is the most important markets after Germany.

[Mikkel Nyholt]

All right. So then quickly following up on that, are you able to say anything about how Germany developed year-over-year Q4?

[Espen Gundersen, Deputy CEO & CFO]

I'd have to look into it, Germany alone in fourth quarter. But the number installation for the total of the year has been stable. And I think Europe year-over-year is also performing stable. So it's -- all this could be single orders and so on in markets where quarters can fluctuate a little bit. But the European market, including Germany, but also the other countries in that region are performing rather stable overall, and that also shows the figures if you look at the full year figures.

[Unknown Analyst]

[indiscernible] Markets. So regarding your 18% EBITA margin target by 2023, could you give us a feel on in what business streams do you expect margins to improve and maybe when?

[Espen Gundersen, Deputy CEO & CFO]

I think starting with sorting, we have opportunities to do better and it's both of the cost side, but also it's about revenue growing where you get the leverage effect upon that. So we are in total not satisfied with the margins in some of the areas within sorting. When it comes to collection, it's overall rather good margins, and I think it's realistically hard to expect significant more. Of course, now we build for long periods, get a negative effect from ramp-up costs, but over time this, of course, is assumed to generate revenue and profit also. So -- but historically, we have had good margins in Collection and a third improvement of that is probably not very realistic.

[Unknown Analyst]

If I can ask one more question. So according to my understanding, it's the mid-market that's driving growth through the sorting market, and thus, you also outlined on the CMD in October that you would this market. So do you think it will be harder to increase your margins and improve when you enter this market? See -- like you need smaller enterprises that are more cost sensitive than the big conglomerates like Nestle and PepsiCo?

[Stefan Ranstrand, President & CEO]

I do have to correct you. I don't think it's a mid-market alone. I think we see growth in most sectors. So, but in food, we have the journey to improve. We are quite broad-based. We are serving a lot of markets and we have been open about that, that we are working towards improving that. But I think it's actually about many levers. It's not 1 significant. It's quite a number of areas we're addressing there. But product margin for sure, cost management for sure is another 1, but also pricing and being focusing on where you sell, making sure that you generate more values. That's more strategically relevant actually than hunting for costs. If you can make your customers more successful, if you can drive growth and profitability by improved pricing, that's more where you really want to play than by just running after costs.

[Unknown Analyst]

I'm sorry if you thought that I said that you said that the mid-market was going to drive relatives, just the report.

[Stefan Ranstrand, President & CEO]

No. The emerging markets will be very critical for the future, and there will be a long journey there. And that is probably going to be a challenge also, but we have to take step by step and find ways to make that right.

[Truls Kolsrud Engene, Analyst]

Truls Engene, private investor. You were very modest in your outlook, I think and it doesn't say much about the growth that is coming and you, at Capital Markets Day, you gave a lot of metrics. I don't remember all of them, but could you say something about the progress according to those metrics that you gave us on the Capital Markets Day?

[Espen Gundersen, Deputy CEO & CFO]

What we said on the Capital Markets Day was that within the next 5 years assume on average to grow top line with 10% organically. And EBITA margin should, by the end, at least be 18%. That's the good targets you're referring to. We also said that this is average over a 5-year period and each year will probably be different. And particular looking at Collection, growing the business in an existing business is hard. If you go to a market like Norway, you'll find the machine in all stores, so it's hard to grow with the high market -- when you have a high market share in a very mature market. So growth in Collection is very much linked to new initiatives. And as you know, there are several initiatives out there so we have faith that they will be materialized opportunities in here. Timing is somewhat uncertain, but you also said that growing 10% in '19 would be very difficult because there are really no new markets opening up in '19 that could generate revenue in a meaningful way. But going into '20 and particularly '21, and so forth, this would be upside down. So we had to look at these targets over the 5-year period. And in Collection, the growth will likely be much higher in the end of the period than the beginning of the period. In Sorting, we don't guide other than give you an indication of the next quarter, which implicitly gives a good growth in that quarter. And adding up the opportunities, we feel a commitment to believe also in that segment, even though it's not a 10%, it's not broken down, it should be possible to grow Sorting 10% also. But since there is less recurring revenue in Sorting now around 20%, 20-plus percent of revenue is service related, it's more about getting out there, selling more boxes, and so on and it makes it somewhat more lumpy by nature. So that is not so hard to be precise on when the growth is coming year-by-year. But adding up the opportunities in total, we feel committed to deliver a 10% growth on a group level. And I think this makes sense adding up from the units level also.

[Stefan Ranstrand, President & CEO]

And I don't think we should see that there is any disconnect in what we are saying here short-term and what we're saying long-term. We just also traditionally are not giving a very precise guidance. That is our way of doing it. Of course, it's not appreciated by everybody, but that's been our way of communicating.

[Espen Gundersen, Deputy CEO & CFO]

It's financial targets.

[Truls Kolsrud Engene, Analyst]

I like the overperforming part of that.

[Espen Gundersen, Deputy CEO & CFO]

Yes, we will try to do that.

[Elisabet V. Sandnes, Senior VP & Head of Group Strategy]

Okay. I think we can follow up with a question from the web. You have probably answered it and then you can say that you answered it. And there's a question from [ Pete Moon ]. How do you feel about the long-term goals sketched out for the CMD today versus when -- back in September?

[Espen Gundersen, Deputy CEO & CFO]

I think nothing has changed on the negative side. On the 5-year period, we think it's achievable to deliver on those targets and we plan for delivering upon them. And yes. I don't know if you have anything more to answer there?

[Stefan Ranstrand, President & CEO]

No, I don't feel -- as I said before, we have the relevant portfolio what we need. So we know what we're going into, we see the market evolving. It's just do it and there are, of course, not everything as we now control. Does a deposit market,come, yes or no, that's more likely than less likely now than it was in the past years, but we know what we're doing. We have the right portfolio to address it and the markets are getting even more positive for us. So I think there's no disconnect. We feel that we are working on the same track as we committed to in the Capital Markets Day, and I think also look back, we have been growing now with some 15% per year over the last 5 years. So we have also lived up to that in the history. So it's not only doing numbers here. Is definitely we have been open about that there's room to improve the profitability and we're working towards that. But we also need to accept that we better invest in new opportunities than focus on a single year profitability. So we discussed that before here.

[Elisabet V. Sandnes, Senior VP & Head of Group Strategy]

Okay. A follow-up.

[Unknown Analyst]

So following up on that. So the recycling markets look like the global market looks like you can be growing for many, many years. Thought about expanding your business more into this recycling market do you see any opportunities today?

[Stefan Ranstrand, President & CEO]

So the question is expand the scope so for us, it's very important. TOMRA has a tradition and a philosophy so we focus on what we do. So we don't want to step around everywhere, but already by going into the circular economy, which we have committed to, that's where you actually start connecting the dots, Collection Solutions and the Sorting Solutions. And with that, you open up new opportunities. For instance, the digital services what kind of a value-added services do I offer. Do I need to develop new type of Collection Solutions for maybe taking other objects than I did in the past? So there would definitely be lot of questions, but we want to stay focused on our core.