TMRAY - Tomra Systems ASA (TMRAY) Q4 2022 Earnings Call Transcript

Tomra Systems ASA (TMRAY)

Q4 2022 Earnings Conference Call

February 24, 2023 02:00 ET

Company Participants

Georgiana Radulescu - Head, Investor Relations

Tove Andersen - Chief Executive Officer

Eva Sagemo - Chief Financial Officer

Presentation

Georgiana Radulescu

Good morning from Asker, Norway and welcome to our Quarterly Results Presentation. My name is Georgiana Radulescu and I am Head of Investor Relations. With me today I have Tove Andersen, CEO and Eva Sagemo, CFO who will take you through the results. You will have the opportunity to ask questions by using the Q&A tool, which is embedded in the webcast. We kindly ask you to pose your questions in good time, ideally during the presentation, because there is a lag between the sending and the webcast. So in that way, we make sure we receive them in time.

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

Tove Andersen

Thank you, Georgiana and welcome all to our fourth quarter 2022 presentation. Today, we present the tenth consecutive quarter with organic top line growth and the third consecutive quarter with all-time high revenues. Our revenues ended on NOK3.477 million, that is up 7% the currency adjusted versus 2021. We actually had the record high revenues in all divisions this quarter, with collection ended up on 6%, recycling 4% and food up 9%.

Our gross margin for the quarter was 42.4% that is 1.2% below same quarter 2021. But this shows also a positive trend versus third quarter this year. So, it’s up 1.2 percentage point versus third quarter this year. As we have previously communicated, we have had the pressure on our gross margins during 2022 due to delays in price increases versus cost increases. On the operating expenses, we ended on NOK979 million, up from NOK794 million same quarter 2021.

At Capital Markets Day last year, we presented the updated strategy where we show that we have ambitious targets both on increasing revenue and improving our profitability. And we are investing in our business and operations in order to meet these targets. This gave them an EBITDA of NOK496 million, down from NOK535 million last year. Cash flow from operations ended up on NOK350 million, the main reasons behind the reduced cash flow were in the quarter for this year versus last year is linked to working capital. We had very high activity level in the quarter and also especially at the end of fourth quarter. And that is the main reason for increases than in accounts payable and accounts receivable.

Our order intake in the quarter was NOK1.5 billion combined for food and recycling, this is up 17% versus the same quarter in 2021. Especially good performance in recycling in the quarter and there is also some positive currency impact in there. This gave us them a healthy order backlog ended last year over a bit more than NOK2 billion. And this has done up 17% of where we started 2022 and position us very well for further growth in 2023.

As previously commented upon, cost inflation has continued to be a pressure point, especially in collection where we have communicated previously that due to frame agreements there is a timeline. It will take some time before we are back at normalized levels. However, this has continued focus from the organization and in addition to price increases we have cost reduction initiatives running in all three divisions. On dividend, the Board proposes an ordinary dividend of NOK1.8 per share that is an up 9% versus the ordinary dividend that we gave out in 2021 and it’s in line with our dividend policy.

Then let’s move over to business updates and we will start with the collection. As I already mentioned, collection had an all-time high quarterly revenues in the quarter of almost NOK1.7 billion. The key contributors to that, was increased sales into Romania and the Netherlands. In Romania, the retailers are preparing for the deposit scheme that will go live in November 2023 and as previously communicated second half of 2022, we had sales of approximately NOK150 million. In the Netherlands, the retailers are preparing for the can deposit extension, which from the low was then approved from January 1 this year, but as we expect to be operationally in April this year. We had approximately NOK100 million in sales Q4 for the Netherlands.

Another highlight in the quarter was that we signed a Letter of Intent with the Mall Group who has been appointed the waste concessionaire in Hungary for their upcoming deposit scheme in Hungary. So that will take effect from beginning 2024 and our Letter of Intent covers then supply of approximately 2,000 to 2,500 machines into Hungary. The pictures you see here are pictures of what we will launch at the EuroShop, which will start this weekend and take place this week and the next week. EuroShop is the big international retail trade fair that takes place in Berlin. And what we will showcase there is really future versions of some of our machines. I think you can see from the pictures here that this looks quite different from the typical reversing vending machines we have had in the past. And I am very excited to see the reaction of what we are launching there.

Several things that we are launching lower left here, you will see the new version of our multi-feed machine, upper right you will see a new backroom solution where we are utilizing the height of the space in the refillers to save floor space. We will also there showcase new digital applications and service concepts. Innovation is key for us. It is key for delivering on the growth, but also to maintain market share and to maintain the margin level and we have really stepped up in this area at the last period. On the right hand side, you will see the updated list on countries that have a firm decision on going ahead with a deposit return scheme. There are not any big updates on that versus previous quarters. I will not go through it in detail. But if you look at all the ones except the Austria on this list will go live then either 2023 or early 2024.

Let’s then move into recycling. Recycling had a very good quarter in Q4 2022 with all-time high revenue and all-time high order intake. And as shown on the graph here, the order intake were up 23% versus last year. We are seeing good demand from all regions and all segments that we are operating in. And then also if you look at the whole year of 2022, it has been a really good year for our recycling division. The division has delivered a growth of 26% in 2022 and also they have delivered a solid order backlog of NOK965 million, which is up 37% compared to where we ended last year. And I am very happy with the performance of the recycling divisions. These things does not happen by itself, it takes a lot of effort to actually grow at these paces. We do believe going forward it will go back to a bit more normalized demand levels. We see that the commodity prices have been reduced somewhat and also as illustrated here with the PET prices going down, however, it’s good to see still significant margin on recycled PET versus virgin PET. However, this doesn’t change the underlying drivers and the underlying drivers in the recycling division it is increased demand for recycled content due to increased focus on sustainability and it is legislative pressure and that will continue to drive the demand going forward in this segment.

Then over to the Food business, Food delivered a strong quarter Q4 2022 with a growth of 9% currency adjusted and also increased margins mainly due to volume, product and customer mix. As shown here, our order take in the quarter was up 14% compared to Q4 2021. We had good order performance in processed food, so processed food was especially good in the quarter, while on fresh food, the order intake was below last quarter same year mainly due to bad harvest of certain categories, certain fresh food categories. Overall, the market sentiment in food is good for processed food, but we do see some signs of weaknesses for the fresh food segment.

As we are presenting Q4, it’s a good time to reflect a bit on 2022 and I wanted to give you some highlights on the progress that we have made in the transformation of our food business focusing on portfolio, market and expertise. On the portfolio side, as many of you know, our food business is the result of four major acquisitions and with four major acquisitions you also then acquire a legacy portfolio. What we have focused on in 2022 is really to consolidate that portfolio, streamline it and also align our innovation roadmaps and improve our lifecycle management. This is progressing well, but these products have typically a life expectancy of more than 10 years. So, this is the work that to be fully implemented will take some time. Another thing we have done on the portfolio is to do co-development of integrated solutions. And one example of that is our cooperation with Murrell, where we have launched Spectra, which is for the poultry segment, in line inspections, all poultry that could then be sold as a part of the Murrell solution for that segment.

On the market side, part of our strategy is to grow in certain regions by leveraging then competence from other regions, which has been progressing in 2022. Last quarter, we talked about [indiscernible], which is the partner and one of the partners that we have chosen to meet the demand for integrated solutions by selected in certain customer segments. Another thing we are doing where we are in the middle of doing it now is that we are changing our go-to-market approach in fresh food for Europe and Latin America. So, what we are doing there is that we are changing from going through a distributor to ourselves go direct to customers both for sales and service and we believe that is significant or an important enabler for drive further growth.

On the expertise side, we have done many different things in 2022, but to mention a couple of things. Category management is key in food. We have gone from being a more traditional sales force focusing on equipment really be a customer-centric sales force and in food that means that you focus on the categories that you are applying into. So we have strengthened our category management and competence, but also we have worked on streamlining our customer-centric back office business processes. Again, we come from four different companies. And we have been working now on streamlining those to increase revenue is increased less sales, increased customer satisfaction, but also increased service. And one concrete thing we are done there is just before Christmas we launched our new CRM system, customer relation management system in the food division. So overall, we are seeing good progress in the transformation of food in 2022.

And we are then progressing in line with our strategy plan. But as we presented as the Capital Markets Day, our strategy is not only about accelerating growth in core, but it’s also about developing adjacent opportunities. So also I want to say a few words around adjacent opportunities. But first, I then wanted to recap what is this really about. So developing adjacent opportunities is about taking our 50 years of experience, the technology know-how we have, the relationships we have in the value chain to then develop new significant business opportunities that can become a fourth or fifth leg of Tomra. They all need to be ripe for scaling. So, it’s not about R&D, it’s really about building businesses and they all need to be under the heading of leading the resource revolution. Today, we have three of these initiatives running. We have one on closing the loop on textiles. We have one on developing reuse concepts for takeaway and we have one which is the plastic feedstock initiative. And on the plastic feedstock initiative, we then launched or approved and communicated a new significant investment into that initiative.

So, what we communicated is that we will build an advanced sorting plant to then enable closing the loop on plastic. What does this practically mean? It means that we will buy mixed plastic fractions from material recovery facilities, this is household waste, mixed plastic, dirty plastic, we will apply high technology best-in-class sorting and washing to really turn it into 10 high-quality polymers that we will sell to the recyclers. The investment will be approximately NOK50 million to NOK60 million. It should be operational by NOK24 million to NOK25 million located in Germany with a capacity of 80,000 tons.

But the question might be then why is Tomra doing this? And the reason why we are doing this it is because there is a significant business opportunity here where we have the right to it. If you look at today, the future demand for plastic is especially kind of hard to get plastic that is not being recycled today. If you look at the legislation, there is a significant gap in the market, the demand is there. And if you look at what is currently happening with plastic, you have 24 million tons of plastic going into incineration, 14 million tons going on landfill in Europe. So you have the raw material, but to actually correct convert that raw material, till a high value plastic that can be recycled, the key thing to unlock that is the sorting capability. And that is what Tomra is good at. So we believe that this represents a good business opportunity for Tomra, where we with our competence and knowledge can really unlock a new circular loop within plastics recycling. So, we are very excited about this investment.

With that, I will then hand over to Eva who will present the financials and outlook.

Eva Sagemo

Thank you for that, Tove. So starting with the group, the P&L for the quarter and we have all time high revenues up 7% currency adjusted compared to them same quarter last year. All business divisions delivered a strong Q4 top line collection, up 6%, recycling, up 4% and food, strong up 9% currency adjusted for the quarter.

Gross margins ended at 42%, which is the 1.2 percentage point down compared to same quarter last year. And as Tove mentioned, inflation is still impacting the margin negative, but also this quarter we have had positive impact coming from volume and mix, especially done in food. Looking at the gross margin, we have no major impact coming from currency less than 0.5 percentage point for the group in the quarter.

OpEx operating expenses is up 18% currency adjusted for the quarter and we are investing as Tove mentioned in the start in business growth in recycling, but also ramping up in collection for new market and then the business transformation project in food. The OpEx run-rate over revenue is at 28% for the quarter. EBITDA ended at NOK496 million, which leaves EBITDA percentage at 14% for the quarter.

Quickly on the full year, we are up 8% currency adjusted ending at NOK12.188 billion for the year and then with EBITDA at NOK1.625 million leaving EBITDA margin at 13.3%. Collection, we had the record high revenues in the quarter, up 6% with also high comparables from last year. The Nordic countries continued to perform good. We had stable existing markets in Europe, but we had revenues from Romania at approximately NOK150 million for the second half of the year. And then in the Netherlands, with ramping up for the current implementation, we had approximately NOK100 million coming from that country in the quarter.

Looking at the margin, gross contribution margin, we were at 37%, which is 2.5 percentage points down compared to same quarter last year. And most of that is a result of the lagging price increases due to these long-term frame agreements in collection. And the rest is coming from unfavorable mix this quarter. In collection we have very limited currency impact on the gross margin.

Operating expenses is up 8% curacy adjusted. And they're looking at the full year we are up 6% on OpEx that compared to an increase in revenues of 4% for the full year. So we are continuing to investing in ramp up in new markets, which explains the extra increase in the operating expenses for the year. EBITDA under NOK246 million, which is which gives us an EBITDA at 15%.

Then looking at the Recycling, all time high revenue also here, up 4% currency adjusted on also high comparables from same quarter last year. And this quarter Americas were especially strong up 54% compared to same quarter last year, gross contribution margin at 51%, which is down 3 percentage points compared to same quarter last year, mainly explained by inflation, but also some related to mix effect. Operating expenses is up 24% this quarter compared to same quarter last year. But looking at the full year we under at 20% increase in OpEx with a revenue growth of 26%. So OpEx is growing in line or less as revenue growth. EBITDA at NOK141 million with an EBITDA margin of 21%.

Down looking at the order cites, order intake, we had an order intake growth of 23% for the quarter compared to same quarter last year. Carriers adjusted we were up 18%. That leaves us a strong order backlog up 37% year-over-year, the currency adjusted up 32%. So our order backlog ended at NOK965 million knock in recycling. And our estimate which is not the guiding but an estimate they're going into the next quarter. So Q1 ‘23 we estimate a conversion ratio of that backlog at 65%.

And then food, we also here had all time high revenues ups 9%. So strong performance both in Europe but also in America, Europe are up 82% and Americas were up 33%. We have some setbacks in Asia or that region APAC region due to bad weather condition previous quarters, but also this quarter as Tove mentioned. The margin, gross margin under that 45% which is up 2.5 percentage points compared to same quarter last year. And as I said, we have a good positive impact coming from volume and mixed, but also some from currency 0.5 percentage points on currency.

The operating expenses in food is – has grown has grown at 60 – the 26% this quarter. And if you look at it for a full year, we are up 12% on a revenue growth at 5%. And the high run rate in operating expenses in food is related to oneness the business expansion and then we have the transformation project which Tove talked about. And then we also are coming more back to normalize activity levels after COVID. And as you know, the APAC region has been – for – has had a longer lockdown than the rest of the world, especially Europe and America's.

EBITDA ended at NOK157 million which leaves us an EBITDA margin at 14%. Then looking at the order picture for food order intake at 14% growth, compared to same quarter last year. Currency adjusted we are up 4%. On the backlog we ended at NOK1.83 billion which is up 4% but down close to 6% currently adjusted. And as Tove mentioned, we are seeing some – so processed food is very strong while fresh food is suffering a bit from that weather condition in part of the world. In food, we have estimated a conversion ratio of 60% of the order backlog of NOK1.83 for the next quarter, so first quarter 2023.

Then looking at the balance sheet and the cash flow, our balance sheet has grown year-over-year 20% currency adjusted we were up 15%. We have been allowing for higher inventory levels in 2022. And we have seen that quarter-over-quarter, so we have consciously been building up safety stock to be able to deliver to the market. And we have also planned for new machines going into new markets and especially in collection. We also had a strong quarter on revenues, and especially then in December, which then gives them a good increase in the accounts receivable year-over-year. We have also done some investments this year to mention some is one thing is the throughput market in Latvia, where we took some of the investment last year but then continued a bit into 2022. And also did this week lose between inventory and tangible assets. And we have also invested in U.S. but also in Australia where we have set up new collection points according to our agreement in New South Wales. And then we have also increased our right of use assets related to buildings in existing markets.

Looking at the cash flow from operations, we are at a NOK350 million in the quarter, down from same quarter last year. We are also down for the full year. And as I mentioned, it's due to the negative working capital effect where that has been increasing this year. And also that we have lower profits compared to 2021. Our equity ended at 47% and our gearing at 1.2. And as Tove mentioned in the beginning we have done a proposal from the Board to pay out an ordinary dividend of NOK1.8 per share, which is then 52% of the EPS for the year and in line with our dividend policy.

So as I said we have been consciously allowing for higher working capital level this year. But we are targeting lower levels going into 2023. We have utilized our strong balance sheet to be able to deliver to the market to prepare for new markets but also to continue to invest in future business. And Tomra, we believe it is important to keep good capital discipline, as we will continue to invest in R&D, future business opportunities and allowing for dividends also in years to come. On the financial position, our weighted average debt maturity at 3.1 years, end of the year. And we have also unused credit lines of more than NOK1 billion. We also have senior unsecured bonds of NOK1.6 billion listed at Oslo Stock Exchange where we have green bonds of a portion of NOK1 billion.

Just to summarize on the currency as you can see from the graph, we have a U.S. NOK which is up 16.8% for the quarter and euro NOK which is up 4.2% for the quarter. And these effects give positive effects on Tomra’s performance as mentioned. The P&L is up 7% on the revenues, we have a slight positive – slightly positive impact on the gross margin and the EBITDA margin for the quarter at 0.5% or even less than 0.5%. And then for the full year our revenue is at 4% positive effects from currency and gross margin at 0.5%. And EBITDA close to 1 percentage point for the full year. And we will continue to be exposed to currency as the most of our transactions both in our P&L but also in our balance sheet is in Euro and U.S. dollar and Australian dollar.

Then looking at outlook. Starting with collection, we expect high activity related to preparation for new markets. And to mention some we are in the middle of the expansion for the Netherlands for can implementation. And we expect that to continue into Q1 at more or less the same levels, as we have seen in the – this fourth quarter. Scotland is going live in August this year, we have Romania, commencing in November, and then Hungary in January 2024. And then to mention some others that that will also go live soon is Ireland in February 24. And then we have Quebec and the remaining states in Australia, that will come during the fall. But of course, the quarterly performance will depend upon the timing of these new markets. And as we have said before, it's the different markets that operate differently. So that can vary in the pace for the different markets preparation.

Then moving on to – and then, yes, maybe I can mention also on the gross margin and collection, because that has been quite a pressure point this year, we expect also the gross margin to gradually improve throughout the year and going into 2024. And then when it comes to ramp up for new markets, so we have a run rate for 2022 at approximately NOK200 million. And we expect that level to continue at the same – at the NOK200 million mark. But we will come back with more information if that will change.

Then moving on to recycling, the pipeline in recycling looks promising. And the positive momentum is assumed to continue but normalized towards more from the high levels that we have seen now in 2022. The demand for recycled material is expected to create opportunities and the circular economy is still an important driver in this business. In addition to also commodity prices, but we see that legislation, the industry and also customer expectation is driving the need for recycled materials.

Then looking into food, short-term, we see the demand in food as more stable. But again, without doubt the need for optimization creates opportunities, the mid and long-term and to mention some it’s high labor costs, but also food safety that we have to have more out there to produce, but also taking care of food waste in production. And then on the cost side, so cost inflation will continue to be a pressure point. But we are taking pricing actions and costs measured. And we expect that to mitigate the supply chain and inflation effect going forward. We don't expect the cost to increase. But we don't necessarily see an significantly drop currently. Except for the elevated freight costs that is expected to move towards more normalized levels. And we see that already.

Then when it comes to the bottlenecks that we have had in sourcing new shortages and also on the logistical side, we expect that to also ease up and we don't expect to buy in the spot at significantly values in 2023. And then the last thing which is important is on the currency and as I mentioned, we are exposed especially to euro and U.S. dollar. And that will have an impact going forward as well in future quarters.

And with that, we can start the Q&A session.

Question-and-Answer Session

Operator

A - Georgiana Radulescu

Thank you, Eva. And first of all apologies everyone if you have experienced interruptions in the webcast. The recording will be uploaded on our website shortly after the sending. We have a few questions that have come in. The first one is from Elliott at Nordea. Can you comment further on the gross EBITDA margins? Do you expect Q4 to be the low point or do you think these levels could continue throughout the first half of 2023?

Eva Sagemo

Yes. So we ended the year at the 13.3 and the last quarter, fourth quarter at 14.3. And with the good momentum and collection and the cost the measures that we are taking to control costs but also taking the price increases into consideration and good momentum in the recycling. We expect to be able to lift the margins going forward, but can't promise anything in Q1 of this year already.

Georgiana Radulescu

Thank you, Eva. The next question is from Marcus [indiscernible] at ACB. Can you please provide flavor of how sensitive economics of the sorting plant will be to virgin and waste material? What price levels will you require?

Eva Sagemo

Yes, so I assume this is linked to our feedstock initiative and investment in the feedstock care plant. So this is a bit of an unchartered territory, because what we will do here is that we will buy something that is seen as a waste today and we will sell into qualities that there is not an existing commodity market for currently, we have been in dialogue both on the supply side and the – so both on the sourcing side and on the customer side. And when we feel that there is both good availability of raw materials into the plant, but also we see significant interest and demand from customers to purchase the material that we are getting out. So we are comfortable with the discussions that we have had that that will create a good profitability for this business.

Georgiana Radulescu

Thank you. The next question is from Elliott at Nordea. Could you provide some detail on how much of the OpEx is related to circular economy future-oriented cost?

Eva Sagemo

Yes. So in this year, as also as previous years, we have – we invest approximately 8% to 10% of the revenue into future oriented cost. And we don't necessarily break it into the different buckets. But what we communicate is that we have the ramp up costing in collection at NOK200 million and then we have an R&D investments are cost at levels between – yes, 4% to 5% of the revenues. And then the rest is within other future oriented activities in Tomra.

Georgiana Radulescu

Thank you. Do you expect the UK opportunity to provide any revenues at all in 2023? Also from Elliott from Nordea.

Eva Sagemo

Yes, so if you look at the UK, so as we have shown on the in the presentation, Scotland will go live with a deposit scheme in August. So we do expect impact from sales into Scotland this year. If you look at the rest of the UK, UK just communicated the result of their consultation with an indication or go-live late 2025 with the deposit scheme. So for the rest of the UK, I don't expect a significant impact on sales in 2023. However, the Republic of Ireland is going live in February 2024. And we expect impact from sales into Republic of Ireland this year.

Georgiana Radulescu

Thank you. The next question is from Daniel Haugland at ABG. Hi, you said gross margin is expected to gradually improve throughout the year and into 2024. What kind of levels are you targeting to get back to in 2024? Historically, it has been at 40% to 42%.

Eva Sagemo

Yes. It is uncertain, because we need to also succeed on the levering so increasing our prices and also taking their cost – and also have a success on the cost initiatives that we are running in Tomra. So I'm not – I don't want to go into details what we expect for the – for this year and then going into 2024. But we are optimistic in order to increase the gross margin into towards the end of this year. And then we need to remember that we have this long-term ambition of having EBITDA level at 18%. So we still have some years to deliver on that profit target.

Georgiana Radulescu

Thank you. And with that we have no further questions. So thank you everyone for listening in and see you next time.

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