Tomra Systems ASA

OSE:TOM

Earnings Call Transcript 2019-Q4

[Stefan Ranstrand, President & CEO]

Good morning, ladies and gentlemen. My name is Stefan Ranstrand. Together with Espen Gundersen and Bing, we are today presenting TOMRA's fourth quarter result of '19 and the full year. Welcome to attendees. If we look at the year, it was not an uneventful year. But if I go straight to the point, I think we can be pleased with another year of growth. After adjusting for currencies, we had approximately 5% growth in revenues which was a growth from both divisions. So we also had 10% growth in earnings -- EBITA, ending at NOK 1.4 billion in round numbers. And we are proposing in line with our dividend policy, where we have said that our dividend policy is to pay out between 40% and 60% of earnings per share. We're going to pursue -- the Board is proposing NOK 2.75 in dividend. If we think back a little bit on the macro picture, it was a year that had some events. One thing for sure which also impacted us was the U.S.-China trade war. I will come back a little bit more to that later, but it did affect our Food business and the order intake in the first half. We are also following the global requirements for better resource productivity, for circularity and for environmental protection. The European Union launched a new law or directive called the Single-Use Plastic Directive, which was launched in June last year, which is anticipated to have a big impact on the recycling activities throughout Europe and, of course, also impacting TOMRA as such. So these are some of the big things. And I think that we can see -- I was personally at the World Economic Forum, and I could see that out of 6 statements, 6 out of 6 was you could find the word environment, sustainability or circular economy in there. So it's really in the midst of the agenda today, these matters. But before I proceed, I think especially in the Food side, we did have a bit of a slower first year, and it was clearly related to the U.S.-China trade situation. But we are happy to see that we got a shift and a much better momentum in the second half. When I talk about the quarter, again, an event that affected us is coming a little bit out of the blue. I think we all have following the coronavirus situation. If I look into the TOMRA situation, number one, I'm very pleased to be able to tell you that we have had no people of our employees or their families that has been infected by the virus. We have put up a crisis team, so we have been strictly removing out all expatriates, limiting -- closing offices, factories for a period of time and limiting all transportations within the country. So we were pretty active in that regard, and I'm very grateful for -- that it works so well. Our operations are starting to resume, so people are getting back. It will take some time because of some travel restrictions. There are some quarantine requirements. But people are starting to get back into office and to factories, and we are starting up again. We have also assessed the overall situation when it comes to the direct business impact. And in the short term, we have -- we are safe. And it's maybe in a way good because the coronavirus spread or the announcement of it, at least, coincided very well with the Chinese New Year, which is in a way very tragic for people that they cannot travel within the country and see their families. But normally, for the Chinese New Year, it's a period where you have to stock up before that because you know that it would be a couple of weeks where it is slow supplies, slow economy. And certainly, we -- it coincided very well because we had stocked up. And if I look at the situation again from a supply point of view, since we have quite a lot of supply activities in China, in the short term, we see no impact. If this continues long and spreads out, then we'll have to reassess it, and of course, we are on top of this all the time. But -- so that's good news. China as a market is rather limited for us yet. It's not a major market like the European market or the U.S. market. So also from an order point of view, I would expect it would be slower in the beginning, but it has really no noticeable impact on the TOMRA Group. So that's maybe as a starting point. As since we had quite a slow order intake in the first half in Food, it also affected the revenue generation in this quarter, so we see a slight down in -- or we see it down in Sorting Solutions, whilst Collection Solutions continue to be strong with a 6% growth there. But the -- maybe the main highlight, I should maybe have started there, is really that the order intake came in strong. It was an all-time high order intake. If you calculate 16% growth year-on-year, it's certainly something very good. And also, cash flow from operations came in with an all-time high. So I think these are, for us, very important indicators of the temperature of the business and the market momentum. So that's really what I wanted to highlight on the quarter as such. Last year, TOMRA established a division called circular economy. We have invested here in a team -- or invested, we have built up a team of around number 20 people. And I see that this is something that's growing. This is starting phase. And it's really to respond and capitalize on the opportunities that emerges in this space. If we use this picture that is stemming from Ellen MacArthur Foundation, which we have used a number of times, but it says that we are producing around number 80 million tonne of plastic packaging every year. And after consumption, very little of that is being recycled. Most of it is ending up in the nature, on landfill or being burnt in incineration plants. We know that we have a very unique offering here that is matching the needs of a circular economy for plastic and for other materials too, but I'm really assuming plastics here, because we have the know-how and we have the technologies in collecting waste, which we have done since inception of TOMRA for almost 50 years now; and we have unique position, knowledge and technologies for sorting our waste, and actually to build the circular economy, you need to combine these 2. Therefore, we have put up some aggressive ambitions here how we want to contribute to building a circular economy, which is very important for the society. And also, if you think of the SDGs, for the Sustainability Development Goals of United Nations, this is really critical that we transform from a linear to a circular economy. And we have put ourselves some targets. So what is collected today for recycling out of the plastic packaging waste, it's 14%. We want that number to become 40% by 2030. What is being closed-loop recycled, that means if you take a material and bring it back in the system and out comes a new material of the same quality, that's what we call a closed loop. We want that number to go from a mere 2% up to 30% by 2030. And in order to do that, of course, you will need to build a lot of processes. It's actually work across the whole value chain. It's not only enough to -- for the industry to invest in collection and sorting technology. You also need to work on the demand side with the brand owners, with consumer goods companies and others to start using recycled content and replacing that with virgin. So -- and we need to also bring up the quality in the system. So today, a lot of recycling or waste management capacity is available, but bringing it to the final point of quality and deliver consistently of that over time to meet the demand side is needed. We see there's a lot of movements out there. A lot of companies make pledges to go for sustainable packaging. You can look at basically all the big brands in the beverage industry and in the consumer producing industry. They recognize they have to do this, else their consumers will not support them in the future. So that's mere matter of survival here really to follow that demand from the consumer side. For us, these pledges which we're doing here is not a effort that TOMRA alone can do. We need to collaborate. But we want to take an active part in here. Therefore, we are taking the lead in creating this circular economy division with a team of experts, really the best people we've handpicked for that. And we have joined a number of alliances and working corporations. We are working closely with the -- for instance, Ellen MacArthur Foundation on trying out new technologies that can enable this. We are a member, a proud member of the Alliance to End Plastic Waste, which is the biggest industrial alliance in the world trying to tackle the plastic pollution. If you think of it, the alliance alone has about 1 million staff if you combine the companies that are in there. We are investing as an alliance $1.5 billion into finding solutions in how we can build this. So these are -- there are some very serious efforts behind this, and we want to be in the middle of that. We want to contribute. We want to drive for a transformation. And obviously, it is very matching with our business opportunities, too. So it's not out of the blue. But this is an investment we have taken, and we are committed to this, so this is part of the strategy of TOMRA now and going forward. Moving on to Collection Solutions in the quarter. Revenue primarily driven out of our new markets, meaning Australia, we are very pleased with the activities we have both in New South Wales and Queensland. They have exceeded our expectations. It's been a good project. It's been a good investment. And we are, of course, there to serve it and making sure we deliver good systems. I know by own experience that is also perceived as a good system. So we are grateful that we got the opportunity. I'm pleased and proud of the team, what they have done, such a great job. You know that Western Australia have been also planning to introduce the system, and they have now announced the results. And TOMRA have been bidding for that, and we have got 4 stations in Western Australia. I will talk a little bit more about that on the next page. We are also -- we'll label that what we call ramp up. We know that there will be quite a lot of markets coming up especially in -- within the European Union following the Single-Use Plastic Directive. So we are continue to spend in building up our capabilities, our position and educating a market for that. So that's also an event that is happening. What also happened, I think we can say predominantly, in the quarter was there was quite a lot of bushfires in Australia. Our operations have been free of any significant impact, so it's been running well. As I said, our business has been running well. We have used this platform which we have of our collection points in New South Wales actually to create a donation function so that the consumers could donate money, which has then been used to -- for aid in the bushfire, and that has landed very well. So I think that's also a sign that you can use a platform like this one for delivering goods.Collection Solutions in general is continuing to perform on a solid basis. The growth predominantly driven by Australia, as I said. But also, Europe has been stable and good and basically stable in North America, too. So it is continuing to be a very sound business for us, and we are excited about the future there and, of course, continuing to invest. If I look into the overview of the new markets. Western Australia, I just touched on that. Western Australia is by geography quite big. Especially for most European people, it's a vast territory. But most of the population is living in the area of few cities and predominantly around Perth. So that's obviously where we'll have our activities. There is the operator, the system operator, decided to have quite a lot of small providers of collection points. So TOMRA got 4 points. And there are in total some 60 entities that are participating in this system. Where I think we stand out is providing a very modern automated solution. Most of these collection points will be manual. So that's maybe where we can see the difference. We are keen to be there, and we want to contribute to make it a good system and hopefully also show that our technologies adds more value and with that expand over time. The indicated start-up is 2nd of June this year, and that's a commencement date, so then we have to be ready. But I think in this time, since we have done both Queensland and New South Wales, that should be fully possible for us. Scotland, as you know, have gone through their consultation period. They are working on the regulation. We have no news for now around that. So when the regulation comes out, that's when we can communicate how we see that the system will impact our opportunities there. Portugal decided in 2018 to introduce the deposit legislation. We are anticipating and positioning ourselves for some pilots where they want to test out the different models. So that is what is happening there. England have gone through consultation. They are working on the legislation -- at least the first consultation round, working on the legislation, and really no news for us to mention in that regard. And France have gone through and defined a circular economy law. They are committed to the SUPD, the targets of the European Union, but they have not yet defined how they will exactly do that. So they are now assessing the situation of the effect of the existing system, use that as a basis, and that assessment should go until 2023, we have been told. So that's what you have on the new markets. Then going over to Sorting Solutions. I think one of the most important areas for us to follow, what was a little bit of concern, was really what happened in the food market. In the first 2 quarters, we saw a slower development. We anticipated that there will be improvement over the year, and it came also. We -- even though all the U.S.-China trade disputes are not settled, there is a need to invest continuously. The food market continues to grow. There are more and more need for food. There is more and more plants -- you plant new farms, et cetera. And when the products are ready to be processed, they need to be processed. Therefore, even if there's a trade dispute that creates an uncertainty for a period of time, it doesn't stop the movement as such because there is a mass in the system that is moving around -- or moving along all the time. So we did anticipate that it will become an improved situation. As we had this trade dispute, we of course, with our global footprint, we are very fortunate because we could pick up on a lot of opportunities from other places that went in and compensated for the lack of supply of food from U.S. to China. Because the Chinese people continue to eat and wanted to eat good food, so they started sourcing from other places. And of course, that gave us an opportunity. But then towards the second half of the year, also U.S. market came back strongly. So today, we have experienced -- or in the fourth quarter, we have experienced good demand in all areas. Since I am on the food, I will continue a little bit more on that. We also had the first year of the acquisition BBC Technologies. And in one single word, we are very pleased. Good development. Food is a strategic area for TOMRA, therefore, we have also decided to strengthen the leadership of our food organization. And we have just hired in the fourth quarter a new leader for Food. His name is Michel Picandet, a French national, and he is -- have had his entire career in the food sector. I'm very thrilled about what he can do together with the team. Going over to the recycling side of the business, we do have a continuous demand for processing capacity of waste. Between 2010 and 2025, waste is growing with about 70%, the waste generation, and that will continue. Traditionally, we know that a lot has been landfilled, a lot has been incinerated, and the whole world is turning towards doing something better here, recovering the lost resources. And of course, that fits very well with us. We are able to take out mixed fractions and make them into clear fractions so that you can build a recycling loop. On top of that, we have got drivers. So the drive from the waste generation is growing -- waste generation is critical. On top of that, we have also some legislation pushes. It started a couple of years back with China, said we will not tolerate that waste being exported to us anymore. You better handle your own waste. So they went out with what they call the National Sword. And that really, overnight, changed the landscape, and we saw big demand in the Western world to do something about the situation. We have seen that effect, and we still see that effect. We have the whole push, which I talked about before, on sustainability with big corporations, recognizing that they have to produce sustainable packaging, sustainable products, using recycled content and moving towards a more circular concept. That is certainly driving the demand. So we have here a number of different dimensions driving into this market. So we have throughout the year and actually globally experienced a very robust situation in the recycling market. So with that, not to take all numbers and so, I think I hand over to you, Espen, and let you cover the financials and add to what I did not cover. Thank you very much.

[Espen Gundersen, Deputy CEO & CFO]

Thank you, Stefan. Yes, now the exciting part, the figures. As always, let's look at currencies. Also this quarter, we have some tailwind from currencies of the dollars and euros has strengthened versus Norwegian krone. And then for that reason, we also see improved performance, which we've tried to illustrate on the right-hand columns, with adjusted figures. For the group, 4% up on top line. Currency adjusted, it's close to unchanged, 6% up in Collection and 6% down in Sorting Solutions. Gross margin is slightly up, if we allow ourselves to include decimals, 42.5% last year, 43.1% this year. Some additional costs from ramp-up also this quarter, but all in, NOK 408 million in EBITA, up from NOK 396 million last year. If you look at the full year, we are 9% up on top line, 10% up on EBITA line and 11% up on the EPS line. So despite significant future-oriented costs recorded on the OpEx line, we still managed also this year to grow the bottom line faster than the top line. Collection Solutions, 6% up mainly stemming from Australia, which is supported in the rest of the world. There's still growth in New South Wales, Queensland adding on top. And the other markets is round figure stable, so the growth is coming from down under. Some additional OpEx but still 16% up. FX adjusted for the quarter. NOK 216 million at the bottom line. If you look at the full year figures, It's said in the beginning of the year that we estimated there around NOK 100 million additional cost this year. We ended up NOK 95 million more. Some of this is FX, but still, it's not very far from what we guessed in the beginning. Sorting Solutions, yes, down in the quarter, but it's tough comp figures. We are comparing ourself against the best quarter ever. And Food had this low order intake in the first half of 2019. So consequently, we see somewhat less orders taken to P&L in this quarter. Recycling is stable. And still, it's the second best quarter we ever had. And we came in at a conversion ratio of 91%, slightly above the estimate of 85% to 90% but not very far above either. Gross margin is up, mix effects. But EBITA is slightly down because of lower revenues and some more OpEx, and they got NOK 216 million for the quarter. Orders, good intake in both Food, and Recycling, all-time high order intake. So despite somewhat high revenues taken to P&L or more orders taken to P&L., we still end the year with a solid backlog. We are up versus end of last year, and we're also up versus end of the third quarter. Estimated conversion ratio is 75% to 80% for first quarter. First quarter conversion ratio is usually lower than the other quarters. It's a lot about Food. It's winter on the Northern Hemisphere, less orders being delivered. But still higher conversion ratio than we had the last 2 first quarters. And as always, this is not guiding, it's just to give you an indication of how much the backlog will be taken to P&L for those that want to model us on a quarterly basis. Cash flow. We started the year and particularly second quarter was a slow back cash flow quarter. Third quarter and then particularly fourth quarter has been strong. All-time high order -- cash flow in fourth quarter, NOK 600 million even if you adjust for the IFRS effect of NOK 72 million. Looking at the balance sheet. Still, we have a higher inventory than we had 1 year ago. It's 10% up. Receivables is down 1%, more or less, but we can do better on inventory, and that's a focus area for 2020. So I hope standing here 1 year from now, we can show somewhat lower order intake in those -- or inventory in the base business. But still the cash flow ended rather decent for the year. And the balance sheet, save for working capital, the only thing that maybe should be commented upon is the IFRS 16, which, of course, influenced a little more than NOK 1 billion added on fixed assets or tangible noncurrent assets, as we call it now, and the corresponding figure on interest-bearing debt. We issued bonds in November. First time we approached those type of investors. It was well received, significantly oversubscribed. 50 basis points and 75 basis points, respectively, on 3 and 5 years money which we find a good pricing, and I'm happy with that, particularly being the first time in the bond markets. So now we have sufficient financing for 2020. Dividend of around NOK 400 million to be paid out in May. So when going into 2021, we need to do more. Whether that will be bond or more revolvers or a combination remains to be seen. The Board proposed a dividend of NOK 2.75. It's within the range of 40% to 60%. That's the policy we established almost 10 years ago and has been delivered upon ever since. So this is 49% of earnings per share and close to the average of what we have done historically also. TOMRA has a strong balance sheet, a good recurring revenue from a significant part of our business. So we think it's the balanced suggestion reflecting -- giving the shareholders a direct return now but also keeping a sufficient, solid business for exercising on the opportunities that we assume to materialize in the years to come. Looking forward, as Stefan said, no significant impact from the coronavirus in first quarter when it comes to the P&L performance. If this kind of continues to get in control, we don't see significant challenges going forward. Of course, if the situation escalates, we will, as all companies that have a value chain that's partly started in China, have an impact on it. But we will come back to that if things develop in that direction, which it doesn't seem to do currently. So -- but P&L, first quarter, not really, no impact. There are significant opportunities in pipeline for TOMRA in general. And to be prepared to execute upon them, we need to invest also when it comes to people and competencies and resources. So TOMRA will also in 2020 continue to employ people, establish ourself in market that we assume that will materialize and that there's a cost attached to this. This goes both for Collection Solutions that will continue to have ramp-up costs. It also will go for circular economy units that Stefan also talked about. Combined, we assume that the cost increase related to this is NOK 100 million to NOK 150 million. Mainly on Collection but also group functions will increase year-over-year in 2020, and that's the circular economy part of this. Beside that, top line, Collection Solutions, there are no new markets currently in the short run, therefore, stable business. Still some year-over-year increase in Australia, maybe slight increase in Central Europe, but overall, it's a stable and low growth business going into first and also second quarter. One technicality. In U.S., in our material recovery business, we have had a contract that historically has been a bit [ gross ], meaning we are processing aluminum, glass, and the value of the material has gone through our top line. Starting 2020, the contract is slightly changed. I mean now it's a tolling agreement. We only get paid for the service we do. So the top line in Americas in Collection will go down with round figures 100 million, 2020 versus 2019. No impact on the gross contribution, no impact on the EBITA. So if you got loss on that level, that's just a change in 2 years compared to each other. In Sorting Solutions, there is good momentum in recycling. There's been a good recovery in Food, good order intake in fourth quarter. So we see this continue into first quarter, and we gave the conversion ratio. By calculating that, you see that we also expect revenues growth year-over-year in first quarter. Last comment, just remember, currency, with the dollar, above 9; and euro, above 10. Also, first quarter will have a positive currency effect on our figures compared to first quarter last year. But there are still 1.5 months left, so -- but you know the mechanisms. I think that concludes the presentation, and we open up for questions from the web and the audience.

[Bing Zhao, Director of Investor Relations & Strategy]

Okay, we can start with questions from the audience. Please? Martin Stenshall from Danske.

[Martin Stenshall, Senior Analyst]

First, congratulations with a great Q4. The first question is basically regarding Scotland. If I don't remember correctly, I think that the indicated start-up has been the first half of 2021. Now I can see you're stating 2021, so it seems that there might be a bit of a delay there. Is there anything that you could add in terms of what is delaying the political process to actually get this, let's say, total deposit build-through in Scotland?

[Stefan Ranstrand, President & CEO]

Would you like to take this, Bing? Yes. And Bing, maybe that's the closest that's...

[Bing Zhao, Director of Investor Relations & Strategy]

Yes, I can take it.

[Stefan Ranstrand, President & CEO]

Use the microphone.

[Bing Zhao, Director of Investor Relations & Strategy]

Yes. So actually, the government is actually working on finalizing the final legislation. So because before that, all we've heard, so this early 2021, this is also something with -- the government has stated. It's nothing that we have kind of estimated on our own. So basically, we don't really have anything other information than what the government had been said publicly. But then now it's -- we're just waiting for their final legislation. And then with that, we believe they will actually outline the final start-up date. So we should know fairly soon already what will be kind of the final outcome. So before that, it's really difficult for us to speculate, so that's why we put up 2021, yes.

[Martin Stenshall, Senior Analyst]

And then a question on Western Australia. We now learned that there are 60 participants acting in this market. That's a lot of competitors and players. And it seems like there's a whole -- another dynamics in terms of how that market is playing out. Do you see a risk that new markets in Europe could take a similar turn, that there will be a lot of participants and also a lot of manual solutions?

[Stefan Ranstrand, President & CEO]

Personally, I don't see that we anticipate that kind of development in Europe. If you recall what I said before, it's a vast geographical area with a lot of very small villages. And their technology might not necessarily be the right solution, then you probably have some kind of manual collection point being established. And we would find a similar setting in Queensland also that when you go out of the major hubs, you will have smaller points. In fact, the system in Western Australia, we have -- we can say it's good similarities with Queensland. So we are really focusing with our technologies where we invest significant amount of money, then we focus on where it pays off, where you have the volumes. There, the technology can really help out. I don't think you see that Europe has that same kind of landscape, if I say so. We have more cities, it's more spread out in -- but more major areas. So I wouldn't try to draw that conclusion from my end even though we don't know for sure. But I don't see that as a major risk. And for us, it's important to be there. Honestly, we would probably have hoped for more sites. But now we are there, we do a good job, and maybe that will bring us to something more in the future.

[Martin Stenshall, Senior Analyst]

And then a question regarding the increase in OpEx in Collection. Espen, you stated that we could maybe expect a delta of between NOK 100 million and NOK 150 million this year versus '19. Would you be able to comment on the, let's say, distribution, in that increase quarter-to-quarter and also the distribution on Collection versus headquarter costs?

[Espen Gundersen, Deputy CEO & CFO]

Yes. It's more later than earlier, and uncertainty increases as we get in the last 2 quarters of 2021. And it's 80-20 between group functions and the Collections, and the Collection with the high figure.

[Unknown Attendee]

[indiscernible], private investor. Congratulations for the new division. I was expecting that to come after the Capital Markets Day. And can you please elaborate a little bit about when can we expect some revenues and cash flow from the new division?

[Stefan Ranstrand, President & CEO]

Yes, I can tell you the following. The circular economy is -- we can call it a business development function, is really shaping a business where that -- where you need to combine both the players in the value chain and the technologies. So the way we will do this, we will actually use that to build up, testing out, building up, developing the system solutions in collaboration with other technology providers. So to be clear, like people who provide washing equipment, flaking equipment, transportation equipment, where we want, of course, to be the technology provider for sorting and collection technology, so that's also important to know that we don't have ambition to become an operator of any system. We want to continue to be the technology provider. But we see that there's a catalyst need here to bring the value chain together and showcase and really bring up. So to make a very concrete example what it means is you take mixed waste, whatever form you have that. You process that through sorting, washing, flaking and so, and out comes a product that over time will live up to a certain number of specifications. So if you compare oil being a commodity, petrol being a product, whatever petrol qualities you have there, it's kind of similar here. So you need to demonstrate that this is needed and -- possible. And you need to link that working with an end producer and saying, look, I need exactly this specification for my product because the products have different needs and being able to build that process. So we are not aiming to actually create a big P&L in that organization. The bookings will happen in the business division. So it's -- you can say it's marketing, and yes, it creates the market and creates the leads. But when it comes to the pure bookings, we will do it in the businesses. And the simple reason is that to avoid margin on margin, which is -- can be quite a challenge, otherwise.

[Bing Zhao, Director of Investor Relations & Strategy]

I think we just take a few questions from the web. So we start with Mr. [ Pete Moon ].So the first question is, although early, how has the reception been for the R1 and the TOMRA reverse vending machine in Europe.

[Stefan Ranstrand, President & CEO]

So the R1 is our new technology for bulk in-feed, we call that. You can basically, instead of feeding one bottle into the collection machine, you can empty your bag. The technology is being displayed. We have had the first installations. We know that the consumers and the customers are, I'd say, overwhelmed. So where you have the machine, you see a strong volume increase, traffic to the stores. So the first is very positive. And also, we know that the technology is functioning. It's a challenging technology. So all in all, we are very excited about this product. And -- but it's an early stage. We just launched it, and we are teasing out if there are any problems. We want to make sure that it's running very well and can live up to the brand expectations of the TOMRA machine. And so far, it looks positive. So that's all I can say for now, actually.

[Bing Zhao, Director of Investor Relations & Strategy]

Thank you, Stefan. And then historically, TOMRA has acquired a company every 18 to 24 months. Are you comfortable in the value chain in Sorting Solutions?

[Stefan Ranstrand, President & CEO]

For the time being, we are feeling that we have the right portfolio. But the market, as you know, is never standing still. Just to use a few examples, the food industry is the biggest industry in the world. There's a lot of innovation going into the food industry with robotization, big data and automation across the value chain. To say that we are not exploring and evaluating opportunities when they fit with our strategy would be wrong. But I can tell you that we have nothing concrete right now. For us, it's always also very important to make sure that what we have is functioning as a unit and well managed. The same goes for recycling and collection, where we actually have a very strong market position: in collection, round numbers 70% global market share; recycling, round numbers 60% global market share. We were also limited by the law in what we can do or not do. So I do not anticipate something major, but I would also not rule out that in the future, something will happen. For us, it's important that we deliver with quality. And when we do something, it fits very well and is well thought through into the strategy, both from what it adds and how we implement it. That's just the way we work.

[Bing Zhao, Director of Investor Relations & Strategy]

Thank you, Stefan. And then I believe the next 2 questions we have already addressed, being Scotland and the OpEx in 2020, so I'll just move on. The next question is from [ Thomas Garfield ]. Can you say more about your new R1, we've already addressed, and M1, which is the machine in Scotland that we are planning to introduce a bottle collection machine.

[Stefan Ranstrand, President & CEO]

Would you like, or should I take it?

[Espen Gundersen, Deputy CEO & CFO]

Still yours.

[Stefan Ranstrand, President & CEO]

Okay. So the machine in Scotland, you know that when we go into the U.K. market, we are looking at a little bit different landscape. You have quite a lot of smaller stores and kiosks, so what we are looking for here is developing a product that has a small footprint, urban-type of new technology. And this will be needed going forward. Because the world is getting urbanized, space is a constraint. So this is new offering which we haven't had until now. But it's a development, so it will probably be tested in the pilot, so there's nothing more we can really say until -- on that machine right now. And on the R1 I already talked to.

[Bing Zhao, Director of Investor Relations & Strategy]

Yes, great. Then can you say more about potential new bottle deposit markets outside Europe?

[Stefan Ranstrand, President & CEO]

We know that there's a lot of discussions and explorations going on. I think the European Union's Single-Use Plastic Directive, where they put very bold and clear targets for what needs to happen, is stimulating and helping the world. But having said that, the needs are also very different. The biggest need, I would say, where we have the biggest leakage of plastic into the nature and ocean is actually in Asia. But there, they believe very often that they have a very good system. There's a lot of manual pickers living on collecting waste, either in the cities or in the nature, and they just bring that in. It's a very low-quality recycling system that's being established, but it is there. So I see that the speed in doing something here is a little bit slower. But I can also show you that if you look at the main economies in Asia like China, like India, like Indonesia, biggest nations populated, we are there, and we are working, we are educating, and we are also doing pilots when needed. So I would not rule out if something happen in the future, but there is nothing concrete that we can talk about.

[Bing Zhao, Director of Investor Relations & Strategy]

Thank you, Stefan. And finally, do we have any updates on the Marel strategic partnership?

[Stefan Ranstrand, President & CEO]

All I can say is we signed an agreement with a Icelandic leading food processing company in the meat, poultry and fish sector. They are the #1, so say the equivalent of TOMRA, but they do complete processing lines. Through our discussions with them, we both could agree to that our core strengths would fit very well into their offering. So they decided that they will use TOMRA equipment in their lines. That is an agreement which we signed last year. And it's fully on track, but it's still in a development phase. We have to make sure that our equipment is fully integrated into their lines. We need to do some small adjustments to make it fit perfectly. But ultimately, so just to give you a concept, and I hope Marel will not accuse me for presenting something wrong, but if you think of a fish processing line for salmon, for instance, they will make sure that the entire fish is used to its maximum and being packaged and processed in the right way, so you get the maximum value out of every fish. For doing that and ensuring the quality that there are no bones, that you have the right properties of the fish, they will use our sensors. That is the concept here. And so I find it very exciting. They are #1 in the world in poultry, fish and meat. And that's quite a position. For us, we try to enter this market a number of years with a mixed success, to be honest with you. We have recognized that the customers in this sector, they prefer to be served with a total integrated solution. So for us to go and sell our stand-alone systems there is not very efficient. And we don't have that brand name and position in that industry. So I think this is an elegant way to go away from a direct selling into indirectly serving that market through an integration partner. So I'm very excited, and we are very committed to it, but it's still at early stage.

[Bing Zhao, Director of Investor Relations & Strategy]

Thank you. And then moving on with a question from [ Matthew Chen ]. Could you please explain why the net financial result was positive at plus 4 million and significantly better than the last quarter, minus 26.5 million, or fourth quarter '18, minus 32.5 million?

[Espen Gundersen, Deputy CEO & CFO]

It's about FX. And in TOMRA, we do not hedge really in respect that we use hedge accounting. So what you see is the spot coming through every month and every quarter in the P&L on all line items down to the EBIT line, so it makes us more transparent both internally and externally. I don't need to know that this period was hedged on this and so on. It's a spot you see. But if we do secure some on the predicted cash flows we get typically euros and dollars in, and we sell that typically on the fixed contracts upfront. And those are valued at the market price, so meaning kind of trade accounting. And consequently, every quarter, we really had to reevaluate those contracts at the balance sheet date. So what happened in fourth quarter was that the Norwegian krone, the last week after was strengthening significantly. Also, for that reason, again, we also got a positive FX effect in fourth quarter. Now it's been weakening again. And consequently, you can see the opposite effect going into first quarter if this continues. So it is about FX.

[Bing Zhao, Director of Investor Relations & Strategy]

Thank you very much, Espen. And then a question from [indiscernible]. Collection Solutions, Belarus, Quebec in Canada has announced plans in Q1 2020. And rumor has it Victoria in Australia is now also a certainty. Will TOMRA be on the ball?

[Stefan Ranstrand, President & CEO]

So we are -- there are a lot of activities in many markets. We show those one where we have some evidence and facts that something is happening, and we are sharing the facts with you like being said before. There are other markets beyond that shortlist. We see here, you can think of Europe alone with the Single-Use Plastic Directive that there are a number of markets. But of course, we are present in North America. We are having a strong presence in Australia. Wherever something happens, I can assure you that we are there and trying to follow that. And that excludes no market at all. We are -- we want to be -- continue to be a world leader, and we want to continue to serve all markets as long as they are feasible.

[Bing Zhao, Director of Investor Relations & Strategy]

Thank you, Stefan. Question from Jack Stonehouse. Who are the other RVM providers in Western Australia, excluding the manual operators?

[Stefan Ranstrand, President & CEO]

I have to pass.

[Bing Zhao, Director of Investor Relations & Strategy]

I can take that.

[Stefan Ranstrand, President & CEO]

Yes.

[Bing Zhao, Director of Investor Relations & Strategy]

So of course, we don't know exactly in the end who ended up signing final agreement with a scheme operator, although the government initially announced a list of whom that was kind of awarded. So then we don't know the final outcome. But as far as we know, there are no indication, no signs of other existing RVM competitors of ours in that region in Western Australia. So we know that majority of the operators are, for sure, run by or will be run by social enterprises and non-for-profit organizations. So this is -- of course, operating in Australia is something TOMRA have gained quite a lot of experience with after been in both New South Wales and Queensland. Yes, finally, a question from [ Lauren Amelia ] in [ Candriam ]. What are the main areas of R&D investments? Do you need to improve further your sensor technologies for new sorting markets in particular?

[Stefan Ranstrand, President & CEO]

Absolutely. That's the answer. No. So our R&D focus, you can say if you go back in time, TOMRA, we are a product supplier, if you want to say that. We don't make full systems, it's products. And traditionally, it's been very much hardware. Where you see us moving, and we already have displayed a number of solutions, is more in the software area, where you have -- we have already very successful solutions with artificial intelligence that can -- if I use an example, can see whether a blueberry would, we call it, explode -- it's not really exploding, but if you put -- pack blueberries. And by teaching the machine, we can see this blueberry will actually explode so that it's not contained in one fruit. That we're already selling. We have applications both in the Food business, both in berries and fruits. We have it also in the recycling where we can detect whether a silicon tube contains silicon and things like that. That goes actually beyond the sensor by teaching the combination of the sensor and the algorithms what to look for. And that we are doing, and that will continue, and that would be very important in the future. We also work on the digital platform, so to enable to create traceability throughout the value chain, to create -- extract information. I'll give you an example, I go back to the blueberries. We are probably sorting 60% of all the blueberries being processed in the world. There's a lot of know-how about that. Collecting that data, providing that to the industry, providing it to the grower, providing it to the retailer about supply-demand connections and things like that, there's a lot of opportunities. And we are certainly -- rest assured we are pursuing them. We think that will be the additional offering on top, where we're also getting closer to the customer, going away from being a hardware supplier into a embedded solutions provider. And when I say solution, please remember, we limit it to -- we still narrow our scope in a way. And of course, the sensors is a never-ending development. It's very much about seeing more internals than we did in the past. So the origins of sensors is started with camera seeing the outside object. And we go more and more internal, detecting more what we can do and find out. So as an example, we have talked about before that we can say how sweet is this apple. We can do that today. But to find out for the nutrition values, et cetera, so we are really exploring that to its full extent. So continue -- and the pixel, the resolution, to be able to see more. When you went into the diamond sorting, X-ray is not new. X-ray transmission is not new. But our high-level pixel made the revolution when we launched that machine in 2015, it was, right? I just used it as an example. But -- so this is an ongoing development. I can tell you, we are spending. If I combine the R&D with what we do, Espen talked about our future investment, round number of 10% of revenues every year and exploring new business models and technology advancement. I hope this answers the question and a little bit beyond.

[Bing Zhao, Director of Investor Relations & Strategy]

Thank you, Stefan. Well, yes, I don't need to use this. I'm sorry. Okay. So we have some questions from the audience.

[Mikkel Nyholtt-Smedseng]

Mikkel Nyholtt-Smedseng, Carnegie. First question on Sorting Solutions and the geographical revenue split there. There was a remarkable growth in emerging markets and, not so surprising, retraction in developing markets. And you commented slightly on it in terms of saying that North America is recovering, et cetera, but is this a split we also can expect for Q1? And how about 2020, was the -- what I'm thinking is developed markets could probably recover soon. But is the strength in emerging markets just a result of developing markets being weak right now? Or has there been a trend change in emerging markets?

[Stefan Ranstrand, President & CEO]

Would you like to take it?

[Espen Gundersen, Deputy CEO & CFO]

Yes. There's so many things beyond this -- behind this, both the Food and recycling business and the different geographies. But I think the big change is what you really see that we had a lower order intake in Food, and that was kind of Americas that was down, and this was in first half of last year. And we see it on the P&L side now that there are lesser revenue in the Americas. That is assumed to be better because order intake in Americas and in general has been better. So I'm not prepared to say that it's been significant changes other than that. But the major one we'll see that Americas will improve. Asset has gone down because of the temporary lack of orders. Other than that, I don't see any huge changes in the mix between the markets in the quarters to come.

[Mikkel Nyholtt-Smedseng]

All right. And on the inventory levels, you said that you had some improvements to do. What exactly are driving the inventory buildup now? And what can you do to improve it?

[Espen Gundersen, Deputy CEO & CFO]

This is a more mix of many things, so you have to attack it from the current value chain kind of approach but also have the specific markets that can do better. And it's about focus, and it's also about routines, really, so it's a mix of initiatives. But -- and it goes both in Collection and Solution where we have opportunities to do better.

[Mikkel Nyholtt-Smedseng]

Last for me. Your financial targets from the Capital Markets Day in 2018 stated a top line growth of plus 10% and an EBITA margin, hopefully, at 18% in 2023. You were very clear back then that 2019 would not live up to those targets. And now I'm just asking what's your hunch on 2020.

[Espen Gundersen, Deputy CEO & CFO]

Maybe I think what we gave in the outlook statement was what you have to work on. In Collection, we need new markets, deposit markets to have significant growth. Without that, we don't manage to grow. And then at the end of this period, there are many opportunities to do significant growth in 2020. Particularly in the first half, there is really not anything to look at. And that will, of course, influence the ability to make 10% in this year. Sorting is somewhat more volatile. We are depending upon orders all the time. Still not more than somewhere between 20%, 25% recurring revenue from service, so we are more dependent upon the order intake. The momentum is good in recycling. It has improved significantly in Food. So of course, this will influence, but you have to just try to interpret this. I'm not prepared to give the kind of figures, the exact percentages for that. And the bottom line is a direct function of the top line. The OpEx, we have given indications on, and the margins will be rather stable on the gross margin side, and then it's very much a volume game. And then you can do assumptions, and you will find the bottom line. That's everything I'm prepared to do now. And we don't know even more even ourself. We are rather transparent on this and give you the information you have, and then you have to do the work from there.

[Bing Zhao, Director of Investor Relations & Strategy]

Thank you. And do we have more questions from the audience? Okay, any new questions from the web, I'll double check. Okay. So with that, we conclude the presentation. Thank you for coming, and thank you too for listening in.

[Stefan Ranstrand, President & CEO]

Thank you all.