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Edited Transcript of TOM.OL earnings conference call or presentation 23-Feb-17 7:00am GMT

Thomson Reuters StreetEvents

Q4 2016 Tomra Systems ASA Earnings Presentation

Oslo Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Tomra Systems ASA earnings conference call or presentation Thursday, February 23, 2017 at 7:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Stefan Ranstrand

Tomra Systems ASA - President and CEO

* Espen Gundersen

Tomra Systems ASA - CFO


Conference Call Participants


* Erik Botnevik

Tomra Systems ASA - IR

* Mikkel Nyholt

Carnegie - Analyst

* Pete Maun

- Investor




Stefan Ranstrand, Tomra Systems ASA - President and CEO [1]


Ladies and gentlemen, good morning from Oslo, Norway and Tomra's fourth-quarter presentation 2016. My name is Stefan Ranstrand, I am the Group CEO. Together with me today is Espen Gundersen, our CFO. We will together present the results of 2016 and the fourth-quarter 2016 for you.

Let me go straight into the full year. It was a good year. We are pleased in all aspects, noting that all financial parameters are improving. That is specifically pleasant, remembering that 2015 was a very strong year for us. You might recall that in 2015, we had a growth, organic top-line growth, of 29% and earnings improvement of EBITDA of 37%. In this year, we are, therefore, pleased to see continuous growth in revenues of 4% after adjusting for currencies, and that we have growth coming from both our businesses, collection solutions and sorting solutions.

We see a slight improvement in gross margin and we have a fairly well-managed operating expense development, given the dynamics of the industry and the investments we are doing. We have an earnings EBITA of NOK1.1 billion and we have a good cash flow generation of NOK1.1 billion. So, all in all, a good year and we will express the details around these two a little bit later.

But I want to highlight that if you look at the graphs at the bottom of the page, we can see that Tomra definitely is a company that generates good growth since 2009. You can see on the graph here, we have continuously been growing now every year. And we also have a good development on the earnings, delivering a 17% EBITA margin on a full-year basis.

So, in short, we are pleased with the fact that we can, on top of a strong 2015, generate these good results and good growth. And we are pleased to see that it comes from both businesses, which is not such a given especially given the strong development in 2015 in collection solutions. So, in fact, somewhat better than we could have expected ourselves.

That of course comes from then the quarter. This is not the strongest quarter in history, but it ranks as top five ever. We have to remember that fourth-quarter 2015 was extraordinary strong, that was our strongest quarter ever.

If you remember 2015 where we had -- again I repeat myself here --we had a 29% top-line growth. We had a slow start in 2015, so first and second quarter were not particularly dynamic and then it all exploded in the third and fourth quarter and particularly the fourth quarter. And that is what we are measuring ourselves against here.

So we are, on collection solutions, down 7% and that is really where we compare ourselves to this very, very high level. At the same time, sorting solutions show good development with an 11% growth. So a strong quarter from that point of view, measuring on this extremely good year of last year.

Nothing big to say about margin level. Gross margin slightly up, but insignificant. Maybe worth mentioning here we are pleased especially in sorting solutions here because we have had a year with some headwind in recycling, which is an area which normally generates very good gross margin for us, meaning that we can indirectly see an improvement in the food business which is an area of focus for us.

Also on the collections side, not so much to say. We see natural variations due to geographic mix to product mix, customer mix. It's nothing dramatic here, it's just stable and good I would like to say.

We have an increase in operating expenses, nothing dramatic. We had quite a lot of activities. Also in terms of the acquisition of Compac, so that loads the results with about NOK6 million and EBITA which is then down especially since collections solutions down, that is affecting the result here. But nothing dramatic, all in all quite a strong quarter compared to the last year.

I will come back a little bit more to the dynamics in the business later. I think we go a little bit deeper first into the financials, Espen will take that. Then when it comes to what are the dynamics in the two businesses, I will take that slightly later. So I hand over to you now, Espen, to take the financial details.


Espen Gundersen, Tomra Systems ASA - CFO [2]


Thank you, Stefan. A quick look at currency, we have had some fluctuations during both the year and the quarter. But, in general, Tomra gained from a strong euro and dollar and had that for several quarters, had the positive effect from that. This quarter is the other way around and the Norwegian crown has strengthened somewhat. So some headwind from both the euro and the dollar quarter over quarter. This is also reflected in the adjustment figures, as you see on the fourth quarter figures on the right there.

So as Stefan talked briefly about the performance, top-line overall in line with last year currency adjusted. Somewhat down in collection, but offset by stronger sorting. Margin is stable. Despite a somewhat negative mix from the change in the revenue from the two business areas, we have managed to maintain margins overall. OpEx somewhat up. Included in the OpEx figure is NOK6 million on the acquisition cost related to Compac, which is reported under Group functions.

Looking at the balance sheet, it's rather uneventful. When adjusted for currencies, fixed assets in general, this is flat. Inventory and receivables is slightly down, despite somewhat higher activity. So we have a good reduction in working capital which is also reflected in the cash flow development, which is all-time high for 2016 and also fourth quarter came in very strong in that respect.

We also see, again as a consequence of this, that the interest-bearing debt is going down. We now have 0.3 times versus EBITDA, meaning net interest-bearing debt. So it's a low gearing. Consequently, the Board has also proposed to increase the dividend with the 20%, to NOK2.10 for the year.

Bear in mind that we will have the Compac payment of around NOK400 million being paid out February 1, meaning it's already been paid out, so will be reflected in next quarter's accounts. This, of course, will increase the gearing somewhat and then you get the dividend on top of that.

With that, we move onto collection solutions.


Stefan Ranstrand, Tomra Systems ASA - President and CEO [3]


Thank you, Espen. Collection solutions, a fine business, the heritage of Tomra. When we were founded in 1972, the brothers Planke innovated this technology solution which has today become a multinational business where we have a global market share in terms of number of machines, amounting to around 75%.

These machines contribute tremendously to a better environment, reducing littering and providing the consumers and users a very convenient way to contribute to the society and the environment. We collect some 35 billion drinking containers, being bottles and cans, through our somewhere around 70,000 machines in some 30 markets every year. With that we help to reduce littering, marine littering -- think about the plastic oceans which are getting such a topic today -- enabling recycling of these bottles. So we give the bottles a second, third, fourth life, so they will be reused and all in the context of optimizing the resource productivity to make better use of it.

We find this business extremely meaningful. It's also good business for us in Tomra. It's a stable business, it is a profitable business and it has a high recurring side. Meaning that about 50% of the revenues are stemming from service activities and, from the sales, a very high degree is from replacement. So recurring revenues are high here. Which also we have seen in the past that we have very little influence of cyclical effects. When there come up or downturns in the economy, it is a stable business.

If I look at the highlights here, our biggest market is Germany and we will talk a little bit about that soon when Espen comes back. But we are in a replacement cycle in Germany. To prepare for that replacement cycle, we launched a new technology, our ring type of sensor technology in 2013. So the timing was really well chosen we believe and we have really been able to capitalize much on bringing this advanced technology to the market at the right point in time.

We do, however, see that the business is going beyond the traditional. If you look back, we have always been having returned vending machines -- reversed vending machines, sorry. Machines that we traditionally place in retail. But we see that business is moving on, we now have also some more industrial type of solutions for what we call redemption centers, we're going to counting centers, and cover a broader scope of the value chain by that. Being able to contribute even more to an efficient logistics and handling when it comes to recycling of these bottles and cans.

Our biggest market, as I mentioned, is Germany. It's been a strong momentum in Germany in the year and we are still in a sweet spot when it comes to that market. We've had two very strong years now, 2015 and 2016. It is expected that this market will decline somewhat, but Espen will talk a little bit more about details on that.

On top of that, we had the Nordic markets, which is also a very important market for us. Here I'd like to highlight the specialist, Sweden, where we had replacement activities now going on last year especially replacing older machines, upgrading the installed base in the way that they can also have a shape recognition, which was a new regulatory requirement.

The business, for those who haven't followed us so much, is not free to grow endlessly. It's contained by regulatory requirements. So we are successful in markets where there is a deposit legislation. These do not happen every year. We had, in 2006, the big introduction of deposit in Germany which has lifted Tomra to new levels. Since then there's been some small.

The biggest recent one is Lithuania which went into operation in February 2016. We were prepared for that, we had a team there and we have been very active. So today we have about 900 machines in the Lithuanian market and collected some 400 million objects in the year. A result which is beyond our expectation, it's been a very successful introduction.

I learned the other day that it was viewed by the public in Lithuania as the third most important improvement of the year in Lithuania. So that also shows that the public really embraces this kind of solution where they can, with very limited effort, contribute to a better environment.

So, all-in-all, I'm also pleased with our execution power here in the Group. We took on that challenge to install, as I said, about 900 machines in a very short period of time, bringing up the service operation and make everything work in a short time. And it's been close to flawless, at least if you look at the service. I'm sure there were a lot of small issues to iron out by the team, but they had the capability of doing that. So something we are really proud about, showing that we can take on a market like that and make it successful already in the first year. Very pleasant.

Beyond that, we do have quite advanced discussions going on in Australia. We know that -- we have read, and I hope you are aware, that the New South Wales state of Australia has decided to introduce a deposit system. That was originally planned to go live July 1, 2017. That has now been delayed by the authorities until December 1, 2017. So giving some more room to that.

It's still today difficult for us to really pinpoint and define what scope that will mean for us. We have a high ambition to be part of the system, we are active there with the team working on a bidding process and preparing for the different alternatives, in dialogue of course with the state authorities. But at this stage in time, we are not able to define exactly what that will mean in financial terms for us. All I can say, it's a positive development and we are really focused and geared on getting some kind of a share in that market. We want to operate there clearly.

Beyond that, we do expect, in the not-too-remote future, that also the other states, Queensland and Western Australia, will also introduce something similar, if not identical. But something similar to that, what we see in New South Australia. So, all in all, positive momentum in that part of the world.

If I look more globally, I see a positive trend also. There seems to be some kind of [barrier] change here when it comes to the opinion about deposit systems. We see more noise in the air talking about the press and the like. We see more positive political momentum. So not something we can transform into business today. But rather, if you were to say the following question, is deposit going to decline or increase, I would rather say we see a positive momentum for further increases here which I think is extremely pleasant.

And, of course, many people view upon the very good results. If you take Germany, for instance, I think the return rate is -- meaning the recycling degree -- is up to 99% in the country. That is something to look upon and say, why don't we do that and make our country clean and become a sustainable -- become part of the group of people who want to contribute to a better environment and a sustainable society? So I think that's really positive.

So I talked about Germany here, I talked about Sweden. The replacement in Sweden, which was about ,1000 machines, is not going to continue. So that is something we have to calculate when we go forward. Lithuania, the expansion is beyond us, we continue to see that as a stable business going forward. So the big change in the -- and we don't expect to see anything of that in this year, but for the near future will be then Australia.

In the established markets, it's also worth mentioning North America, which is a big market for us. We've had a good development there. We see positive trends in the volume development and also we had high sales of reverse vending machines. So, all in all, very positive.

With that, I think I will hand over to Espen to go deeper into the financials.


Espen Gundersen, Tomra Systems ASA - CFO [4]


Thank you. The quarter came in strong. But remember, we are measuring ourselves against the best quarter ever, so we are down on top-line compared to last year. And this is also in line with what we indicated when we guided three months ago.

Margins are stable around 39%. Last quarter we had an increase in margin, partly because of one-offs. This quarter is more stable towards last quarter, same last year. So the year in total, we have managed to increase the margin around 1 percentage point which is pretty good. Operating expenses more or less under control, but EBIT is down because of lower volumes.

On Germany, most of you remember [the story] (inaudible) Germany introduced deposit in 2006, 8,800 machines installed. It was a long tail, it took several years before all retailers implemented this system. But by the end of 2014, Germany looked like a normal market. You find a machine, you can expect to find a machine in all stores, which is kind of negative for Tomra because the first wave was dying out, but then the replacement cycle started.

So particularly thrilled by the T-9 that Stefan mentioned. At the beginning of this replacement race, we indicated we're using this band where we thought number of machines would be for this four-year period. Now we have two of these four years behind us and it's been high on the range. So it's a limited number of opportunities out there. Consequently, the number of opportunities going forward will be somewhat lower. So don't be surprised if we, the next two years, will report somewhat lower in this band because of the high activity of the two first years.

Which brings us over to sorting solutions.


Stefan Ranstrand, Tomra Systems ASA - President and CEO [5]


Yes, I would just complement one more thing on the collection solutions. I forgot to say it before but I can do it now. If you look at the historical performance on a year basis, we have now six years in a row delivered 20% or more EBITA. During the last six years, not one time did we go below 20% on EBITA earnings. That's something we are a bit proud about and it also comes back from how we are organized.

It's very focused. This is a core business, so we have experts who are doing this all the time. Also it comes back to how we operate, that we have focused very much on technology so we can get good pricing power in the market. But also the sourcing savings program we launched in 2010, which have really stabilized and given us a competitive supply chain. So in my view, that is a quality statement, to deliver 20% EBITA over six years and yet having that success when it comes to the market performance and market share.

But it's all about satisfying the customers at the end of the day, having the right technology, having the right service. That is the daily challenge we all are facing in business and that's something we maintain full focus on.

Then moving on to sorting solutions. Another jewel, if I may say so. Very proud of this business. We are active in three areas. We are in food where we are absolute number one in the world with a market share of about 25%. We are in recycling where we are seen as the reference in the industry and a clear number one in the world with a market share of 55% to 65%.

And we are active in mining which is considered a start-up business for us. Start-up, maybe you can say we've been starting up for many years and we have done that. But it's going on, it's progressing nicely, but it's still small and we are only active in a few areas of this vast mining field. But where we are, it contributes nicely to the business. So that's what we are doing here.

If we look at the performance, it was a good year. If I look into the full year, we had an increase in orders of 8%. If I here look at the mix between the three areas, food was growing strongly, mining was growing strongly, recycling was slightly down.

It's not -- and if I maybe then dive in a little bit more to recycling, I'm convinced that we have not lost any market share. So we have maintained or it might even be that we have grown market share, but let's just keep it at not lost any market share. It's just been a slow momentum in the industry.

That is most likely to be caused by the commodity prices. You know that a big part of our recycling is in the plastic recycling. And of course here, if the commodity prices show big fluctuations, thinking about oil which is a raw material for plastic, then you have effects because our customers are selling recycled plastic to the industry and then the comparison will be virgin material. And if the virgin material prices go down, you would have the spillover effect on the recycled plastics.

In fact, we see that recycled plastics, in many areas, have a higher price than virgin material, so it's more valued, which is, in a way, strange. But then I think we can explain by the focus of sustainability. Many companies today are trying to build a more sustainable profile meaning that they try to, as raw material, use recycled material in order to show the public that they take responsibility and prepare for potential regulations that might come in the future or fees for oil and such commodities. So they are building that and that is generating positive impact on the pricing.

But having said that, it is a challenging situation for recycling. But until mid-2016 we saw a slow phase and then we saw a good recovery. So we were down more than 10% by mid-year when it comes to order intake and we almost caught up at the end. So we are slightly down year-on-year in order intake. So if I look at the last quarter, it was a good -- last two quarter was a good development, a good recovery.

So hopefully that is a sign that the year will continue on a positive path, but there's a volatility out there so I don't want to commit to anything more. But if I look at the order intake, again full-year basis, 8% up, last quarter 20% up. So we see a good momentum in the industry when it comes to the order intake.

Food was, and is, much more stable. What we do in the food industry through our two legs is that we help the food processing industry or packaging industry to automate the processing. I will come back a little bit to that when I have the graph where we also show the acquisition, why we did that one. But here -- and we see a continuous growth in the food processing, you can say something like 2% to 3% is the food growth every year. You remember, we have to produce about 70% more food than we do today by 2050. So there is an underlying demand here which is then not so cyclical like the recycling industry.

The mining industry, as a total, I think we have seen some recovery. But still we are owning some niches and we have been very fortunate that we launched a technology in the area of diamonds in 2015 which has helped us quite much here. So here, on the very bottom right corner, you can see a diamond which is 227 carat big. I just learned that of all the big diamonds found since 2015, 64% of them were found with our technology.

So we make an impact here. Wherever we go in, we make a difference. So it's nice and, yes, it contributes to of course our business right now. We see that as helping us in this little segment where we have found a niche, where we are really the jewel in the industry you can say, if I allow myself to say it that way.

So that is in big picture what I can say right now. In summary, good momentum in food, recycling had gone through a little bit tougher times, and the mining jewel under the jewels what we are trying to operate in here.

With that, I'll hand over to Espen so you can get some more substance of what I'm talking about.


Espen Gundersen, Tomra Systems ASA - CFO [6]


Thank you. A quick look at the figures, a strong quarter, came in slightly above indications we gave last quarter in the range which we indicated, we came slightly above that. And actually on the dot at an all-time high revenue for the quarter. Margins has been stable also this quarter, despite somewhat negative mix effect with more foods and less recycling during the year and during the quarter.

Backlog, as usual fourth quarter came in strong on revenues, as I said all-time high. Order intake was also good, 20% up as Stefan said. But because of the very high revenues also, order backlog is down from third quarter, but it's up from the same quarter last year. So we have a very typical pattern in fourth quarter with high revenues, okay order intake, but reduction in order backlog compared to the third quarter because of the higher revenue.

Conversion ratio for first quarter, the way it looks today is 70% to 75% of the order backlog. Remember that all these figures are old sorting so to say. Compac will be consolidated from February 1 and will come on top of this. It's nothing from their order backlog or anything from their activity included in the figures that we are showing on this slide. But there are more Compac on this slide. So, Stefan, should we maybe together say a little bit about our new investment.


Stefan Ranstrand, Tomra Systems ASA - President and CEO [7]


Yes, let me (technical difficulty) the strategic rationale and what the business is. What we do traditionally in Tomra sorting solutions in food is that we sort in about 80 different application areas. We purify material you can say.

So when material comes from a farm into a processing facility, you will have damaged goods in there, you will have foreign material in there. Foreign material, if we think about a product like potatoes now, you will have -- when you harvest with the tractors, you will get wooden pieces, stones, it can be everything, plastics, textiles, metals that have come one way or another into the farm in the year, it could be small animals. All that is then being identified by our sorters and sorted away.

So that when you, for instance, go into a packaging of potatoes, you are sure that they're only potatoes going into this plastic bag. Or when you do French fries, you make sure there are no stones, no other products in the process than the potatoes which you are processing. So that's really what we do and here we are number one in the world.

We can take it up to extreme levels. If I go into the nuts industry, we've done some mathematical examples there, you can -- we talk about PPM, parts per million. So when you start typically in the process, you will have about 400 PPMs. So on one million pieces, you will have 400 defect objects. When you go down after sorting through our machines -- and we here -- mind you, we have a number of machines in a row -- you will have come to purity of maybe 0.2 to 0.25 parts maybe. So extremely few foreign matters or defect products.

That you could not do manually. It's impossible to do manually because you cannot have people hand picking to this level of quality. And if you imagine that people stand on a conveyor belt and try to look at every object, they can only see the surface. We look 360 degree, upside and downside, and so our sensors are extremely efficient here.

It generates high productivity, but it especially contributes to the quality of a brand that if you are a Sun-Maid raisins or if you are a Kellogg's cornflakes, or companies like that, or a McDonald's, you know how important it is for them to provide consistent quality to their consumers.

That's what we do. That's the type of business where we contribute to this consistency, enabling them to give a brand promise, knowing that when you buy their product it's always the same, supreme quality. With that, they get the possibility to grow. The demand increases, pricing power is there, and that is partly thanks to our efficiency of our sorters. So we use a broad spectrum of technologies to look on the surface, to look at different type of the objects, even look inside the objects, to generate this.

Now, Compac is different. They do not sort away foreign objects. They classify objects. Imagine the following. You get a shipment of oranges going into a packing house. They will have different quality, these oranges. They could have different size, they can have different sweetness, they can have different surface quality. They could have some internal defects, yes or no. And these are qualities which Compac are all able to sort about.

So that at the end of the line you will have different packaging stations, so you can say, this is a Class 1, 1A. This is Class 1B. This is Class 2. You have up to 20 categories of products out of that commodity that came in.

So I hope you see the difference here. And in fact, it's very complementary. We envisage to install a Tomra sorter in front of the Compac line to make sure that that what comes in -- imagine now, oranges. If you have a broken orange, or if you have an orange that has an internal defect, rot, or something like that, or has been hit, and by that you have damaged the fruit. Or you have frostbite. Our sorters should be able to recognize that so that when it goes through the Compac line, it all goes into become a product.

And here we work predominantly in packaging, so imagine that you take kiwis from New Zealand, which is actually a good example, because Compac is in New Zealand and kiwi is a very common product. It will be packed in New Zealand, for shipment. So there you make a first grading of it.

In fact, it's to the degree that you can see what maturity is the product having? So what is the shelf time of it? So that you can minimize waste by that. And then when you come to, say, England, which is a bit -- take longer, it will then be packed in for retail, for Tesco, for the other retail chains, and then will be repacked again. So you have two points here, where you typically work in these applications.

So that is the nature of that business. We see it's a good, strong, underlying demand, especially in the fresh fruit market right now. People seem to be keen on having fresh products and especially when the quality's guaranteed.

If you think back a few years, when you were children, you might be being served strawberries or blueberries in the summer and it was a delight. Today, if you go to a retailer, you can probably buy blueberries all year around. You can buy strawberries all year around. And that is the trend here. So people like to buy more of these fresh products, but they are totally irritated if they buy an avocado, open it up and it's browned, or not up to their expectation. That's our job -- to make sure, when you buy a product, it is on the level of what you expected it to be.

So this business is really, really nice, complementary, as I said, to what we do in sorting solutions, and together we are able to serve what we call a one-stop shop. And you know the food industry is really consolidating. You have few very big players serving the global food market. We want to be the company that can offer them complete solutions with extremely advanced technologies, leading technologies, and that one-stop shop.

So that they can have service at the one hand, they have supplier at the one hand. We have the global coverage when it comes to production or supply of products, when it comes to a service, when it comes to sales and application engineering. That's really what we are striving for here.

Leadership in technology and a broadest technology platform and a very competent team of sales, service and application engineers, so that we can understand their requirements and give them the best and most competitive solutions so that they can guarantee quality of the brand and satisfy the needs of their high-demanding consumers.

And think here about also the trends of 3 billion more mid-class consumers by 2050 than we have today. That is very important driver for high-quality food products, and that is a spot where we want to be contributing in. And that is one of the drivers for this business.

So, in short, that's where we are. I fell that Compac is a jewel that is added to another jewel. We are really proud about Compac. They are number one in the industry when it comes to marketing these core applications like apples, oranges, kiwi, avocado. They are the number one. They're number one in the most important markets, like United States, and they have an absolute technology leading position.

So that is the combination which is a perfect fit. So culturally you can say, really, same aspiration as Tomra has. Where they have the challenge is that they have been growing too much, so that their operational and execution side has been suffering.

And with that, I'll let Espen talk a little bit about the financials and what we want to do about that.


Espen Gundersen, Tomra Systems ASA - CFO [8]


Thank you. And now I know you want to have some figures to put into your spreadsheets. So unfortunately, I cannot tell you exactly what to put in there, because there are uncertainties. There's always uncertainty around the future and particularly around the development here. But we are very confident that we have acquired a company which is in the right industry and had the right technology and had the opportunity to continue to grow and make profitability, no doubt about.

There has been some internal challenges, as Stefan said, mainly related to growth, and these challenges are being addressed. And I think we will definitely manage to solve them. It can take a little time but I think we are on a good progress already.

That said, the financial history shows a company that has been in distress, that has been short on cash as a consequence of lack of cash flow because of loss-making activities in some areas. We have acquired the company from February 1, so we just now have got ownership and really can take control over the company.

But it will be consolidated, as I said, from February 1, and to try to give you some indication, the Company delivered NZD152 million of revenue for their fiscal year 2016, as you see on the slide. And this is the year-ending June 2016. And then you have reported -- or they have reported NZD72 million of revenue for the first six month of their fiscal year 2017, meaning the last six months of our calendar year 2016. So this is history.

There is a seasonality in this business, where we have stronger performance in our calendar year first and second quarter, meaning January to June. So there are good months that are expected to come up as a consequence of this seasonality.

There's also some restructuring being done and part of this is Spain, Italy being divested. So the vendors will keep part of this business as a distributor, going forward and that will have some influence upon the revenues and there will also be some change in the organization in Latin America that will take place within the next three, four months, hopefully. So this will, combined, have a negative influence upon the revenues of around NZD25 million.

So if we look at their performance today. If we start with this NZD152 million of revenues that you had for the year ending fiscal year 2016. It is fair to expect a growth on this figure. So their run rate currently should be higher. But then you have to take out the NZD25 million that will be divested. And consequently, you can maybe see their run rate for the next 12 months, so today is around NZD150 million that those two effects are a wash.

Just using very round figures, giving some indications. Don't take it as guiding, but just thinking aloud together with you, how we can approach this to get some meaningful figures to put into your spreadsheets there.

So, NZD150 million if you use round figures, six as a good conversion rates to Norwegian krone, you are at NOK900 million in a yearly revenue from Compac. Divided by 12, you are at NOK75 million per month, multiplied with two, you are at NOK150 million for a two-month period. So if you should try to estimate first quarter effects, if this was a regular business as usual two months, NOK150 million could be the figure.

But then coming back to the fact that there is some seasonality and we are now into the high season, and also that the divestment in Latin America has not really taken place yet, the round figure is probably around NOK200 million. You can add a little on top of the NOK150 million. So using round figures, maybe they'll end up around NOK200 million that you can put on top. Or whatever you estimate that old sorting business might produce in 2017 first quarter.

Bottom line -- I've been very cautious about talking about the bottom line. You see the history here. We have plans. Not everything is executed, but a lot is identified, but we are on track. I would be disappointed that if it's not a small plus at least on those NOK200 million. But that's more my feeling. I don't want to guide on this. Let's see how this evolves in the next quarters and years.

There is also an earn out, as you probably remember. We paid NZD70 million, up front and the total purchase price can be as high as NZD300 million, because there's a NZD230 million earn-out out on top. And this is calculated based upon the financial performance for the fiscal year in the years ending June 2017, 2018 and 2019. So there is progression payments as we go, but the most important one is the earnout paid in June 2017.

But then we need to be [above] round figures NZD20 million EBIT, combined for these three years. And if so happens there will be an earn out and you can see, based upon this chart, how the earn-out level might be on different performance levels.

So I am not in a position to say how that will work. The idea is that we pay for existing business. We think that NZD70 million -- if we [can generate] NZD7 million EBIT, we have a 10 times on the investment, which is a fair price. Not fantastic, but it's fair. If we manage to improve, which we'll definitely try to do, we will share some of this upside with the vendors. And if it happen fast they can get the significant part of this, but that remains to be seen and it's too early to say how this evolve going forward.

But back to where I started, we believe we bought the right company with the right technology, in the right business. This will grow and it will improve. The speed remains a little to be seen here. We just have owned this company for three weeks now.

So with that I hope I've given you some insight in the data available for having some meaningful ideas about how you should model this in the quarters and years to come.

As I said, talking about the history is easy. Talking about the future is always somewhat more difficult. But try to give you an overall view upon the development the coming quarter and year, starting with collection.

2015 was a great year. 2016 was an even better year in collection. Really not many problems it was -- the engine was ticking on all cylinders, and then you get a good effect. And we got Lithuania last year. Lithuania will be there also in 2017, but it is not additional effect from Lithuania, because you had a more or less a full year in there.

Also in Nordic is Sweden, of course, which has this replacement race, a consequence on new legislation. That will go away. Sweden will be worse, or going down from 2016, both in first quarter and full year.

And then Germany, time will show, but I indicated, as you remember, on the chart, that we have had two good years behind us and still two okay years to coming up, but it's not unlikely that we'll be somewhat lower in the range in 2017 and 2018 than we were in 2015 and 2016.

So growing Tomra in collection now is a lot about seeing new deposit markets opening up. And as Stefan touched upon, there are absolutely things in pipeline which is interesting to us. Sometimes it takes a little extra time to see them materialize. Not everything is materializing. We can't just tell Tomra the stories. We are not in control of the political processes.

But there are probably a little more out there now, a little more positive momentum than we have seen for a long time and hopefully we'll also benefit from this, without being concrete on timing and each project that really will materialize here.

On sorting, food is doing okay. Expected to grow. Recycling, mining -- still somewhat depressed because of commodity prices, but maybe more stable, overall. So we think that sorting will do better next year than this year, but it's a little -- depend upon which business stream you look at.

For first quarter, I've been rather precise on the indications with what I said about Compac and also with the percentage of conversion rate that I showed back on the order backlog. And then, going forward, you of course had to add Compac on top, on the sorting business.

Don't forget currency. You have some headwind now, on currency. Looking out the window today, we are 8% on the euro, compared to average for first quarter last year -- 3% down on the dollar and actually 10% down on the Swedish crown. So, this will potentially have a not insignificant effect on the figures, so please remember, when you make your assumptions.

That concludes the presentation and we open up for questions from the audience and from the web. So please raise your hand and then Erik will help you.


Questions and Answers


Mikkel Nyholt, Carnegie - Analyst [1]


Mikkel Nyholt, Carnegie. Can you comment on the average age of the machine portfolio in the US? It's just that the US has now, in collection solutions, delivered three consecutive quarters of growth. And that doesn't really correlate with the market fundamentals, the way we from the outside see it, so I was just wondering, is it that you have a higher share replacement now, and this will probably go away in 2017/2018? Or how -- where are we in that replacement wave in the US?


Espen Gundersen, Tomra Systems ASA - CFO [2]


Shall I take it?


Stefan Ranstrand, Tomra Systems ASA - President and CEO [3]




Espen Gundersen, Tomra Systems ASA - CFO [4]


US is a slightly different market from Europe, as you know. The biggest challenge in US is the $0.05 deposit that we have in most states in US, compared to, for instance, EUR0.25 in Germany. So it a rather low and making the deposit somewhat irrelevant for people, so the recycling rate is lower and the people that do the recycling, it is maybe not exactly the same as we see in Europe.

Consequently, in Europe the retailers, they look upon the reverse vending machine as the most important machine in the market -- in their store, after the checkout system. So investing, maintaining, making this attractive is extremely important for them, because it's the most important customer coming, using these machines.

In the US it's not black and white, but it's not being invested that much. The machines are in general older and for that reason it's a somewhat more challenging market, particularly we being the market leader selling the top brands and the most sophisticated technology, it's not always that easy in the market.

But we have areas, like Michigan, which is a $0.10 deposit market, and looks more like Europe, where we had good momentum and you're right that we have installed our installed base in US and it increased sales. But it's a little event-driven by tenders being out and replacement in those.

I think overall, in US, I think it's difficult, within the existing business model to go from here and increase a lot on the installed base. So it's more about replacement, and replacement in US is somewhat more challenging, because the wish for top, state-of-the-art technology and also with state-of-the-art price points, is somewhat tougher, that to say.

So I think, to really to get a lift in US, we also need to make machines that cheaper, as you may, tailormade for US market. So not going ahead and announcing a new strategy for US, but I think also, we have to work internally to manage to get the higher replacement rate in the US, which is today is rather low. And the age for the machines is probably closer to eight, nine years, on average, for reason mentioned.


Mikkel Nyholt, Carnegie - Analyst [5]


Thanks. And you've been pretty specific on figures for Compac now, but if you try to elaborate or split out the synergies between Tomra and Compac, is it possible to quantify of give us some sort of guideline for how fast you anticipate this to get synergies that will increase earnings?


Stefan Ranstrand, Tomra Systems ASA - President and CEO [6]


Number one, we put a bit of a priority order here. Compac, you have seen the financial statements, that I label a turnaround phase, in which we are now, so our very first priority will be to show that this is a profitable company, which I'm convinced that it will become, and I think this can be a healthy, profitable company. If not, we would not have gone into it. So we are convinced about that. But there will be a journey.

And if you think back now on the management of Compac who has led the company, have experienced strong growth in the last years, talking about 30% growth per year, struggle with the operation, on top of that, having stressful financial situation. It's been talked about the cash. You have seen the historical earnings. And doing a sales process of the company, entertaining that process also, you can imagine they have been going through quite tough times.

I'm quite impressed with where they are today and their high energy level, their focus on improving the business. I don't see a sign of what I just described, when I meet them. So I'm impressed with the team and their high ambition to do something.

So, really for us, we will put most of the emphasis on that, to improve it. And we have therefore decided also to have this as a standalone entity in our organization, so to say, so that we will not do massive integration efforts in the beginning. We call that the soft integration, where we're looking to the areas of marketing and sales. There will be some aspects in technology, where we can piggyback on both sides.

They have leading technologies in terms of really seeing very much of every object. I mean, they see an apple 10 times more than you will be able to see with your own eyes. They look at it so carefully, 360 degrees. While we have tremendous strong technology platform to offer them when it comes to internal monitoring of objects, laser scanner, etc., which we will of course all look into how we can bring that technology over to Compac, and make them stronger.

So, what I want to say here is that, yes, we do have some internal estimations of that. Careful estimations. But the number one priority will actually be around making them profitable, to show you, as investors also, that this was a wise decision, generating shareholder value. That's our purpose here.

Therefore, I do not want to commit to any numbers here, when it comes to the synergies. But rest assured, we would not have done it if we will not see that there were positive contribution on both ends.

And when it comes to the installation -- I touched on that -- we see that we can put a pre-grader in front of their line where we put Tomra sorting equipment. At the same time, remember, we are big in the potato industry, where we see a good opportunity to also put Compac lines behind our Tomra sorter. So that -- we don't want to give a -- maybe we'll come down to that when we have some kind of more deeper presentation, but at this stage, let's be cautious about giving any numbers.


Mikkel Nyholt, Carnegie - Analyst [7]




Erik Botnevik, Tomra Systems ASA - IR [8]


We have some questions from the web, also. The first one is from [Thomas Frafeur at Broad Park]. Can you say something about the reverse vending goes digital, the announcement at Tomra Connect? I'm especially thinking about the in-store market possibilities.


Stefan Ranstrand, Tomra Systems ASA - President and CEO [9]


I could not hear you very well there, acoustically, but I understand about the -- our commercial software platform and in-store marketing. Was that the question?


Erik Botnevik, Tomra Systems ASA - IR [10]


That's correct.


Stefan Ranstrand, Tomra Systems ASA - President and CEO [11]


Well, it's interesting. When you pass through a reverse vending machine, you're actually at the point where you are going into a store and make your purchases. So that is a very attractive point, actually, to provide commercial support, i.e., direct marketing. You can really, in the modern screens, which we have here are big. Also, on the receipts you can issue coupons. So that's something we're exploring.

It's not big to date. We have talked to some retailers about it. But we have enabled the technology platform to do exactly that. We can bring messages on the screens. You can -- the store has the ability to activate their promotions on the screen and you can customize the label so that also they can become some kind of coupons and giving discounts for specific articles.

I think there's much more to explore to implement it, but the concepts are there. We have them. But when it comes to how widely it's being used, how it's been upsold by the industry, I think we still have a long way to go there. So that's actually all I can say to this.


Erik Botnevik, Tomra Systems ASA - IR [12]


Then we have one question from Martin Stenshall at Danske Bank. How do you consider a potential new market in some regions of Spain and what other new potential markets do you see?


Stefan Ranstrand, Tomra Systems ASA - President and CEO [13]


Would you like to take that, so we shift around a bit?


Espen Gundersen, Tomra Systems ASA - CFO [14]


Yes. On -- the problem in this process is it's linear. It's not this often you have milestones that's defined. So it's more machined activity in the regions. And I think in general there is a lot of activity in Spain and I think typically it is -- the common denominator is they have beaches. That's where you find -- the same thing in New South Wales. It's about cleaning the beaches. That's the most important driver for these deposit initiatives. It's about littering and particularly on the beaches.

For that reason, you find it on the Canary Islands, you find it the Balearian Islands, you find it in Valencia, you find it in Catalonia. So to some extent it's the usual suspects. We have talked about this region for some period of time, and don't be surprised if one of these regions within the not too distant future really will take the next step and implement something that will look like a deposit system.

But I will not -- and I cannot be more precise than this, because it's those political processes again, and it's a little tough to be very concrete on commenting upon this. But we are present and following them and we are to some extent optimistic on what we are hearing here.


Erik Botnevik, Tomra Systems ASA - IR [15]


Then a couple of questions from Eivind Sars Veddeng at DNB. The first one is about sorting. What drove the higher than guided backlog conversion ratio for sorting in Q4?


Espen Gundersen, Tomra Systems ASA - CFO [16]


That's more by accident or by incident. It's -- when we guide -- I gave an indication. It's based upon the shipments and when we think the shipment will take place. And there was a few more shipments being done at the end of December that was initially planned for beginning of January.

So the reason I can be rather precise on this range is because when we stand here, three months before month end -- quarter end, it's not new orders that's coming in that will be delivered during the quarter. Those orders are in the backlog. It's about execution. And sometimes things are being rescheduled a little bit -- and that's happened this year at a time, and this time it meant somewhat more revenue's been recognized. So that's the reason.


Stefan Ranstrand, Tomra Systems ASA - President and CEO [17]


And just to elaborate a little bit of that, I mean, we very often install equipment in, say, greenfield processing facility and it could be that the customer is -- when they complete their new facility they can be on schedule, they can be earlier or they can be late. And depending on how the customers -- it's really driven by their outside.

It's not our ability to produce. We have great scalability going up and down in our production and sourcing -- we have a flexible sourcing concept. So we are not the limitation here. It's really the market, when they want to have the installation and there of course it is important we listen to them. They don't want to have goods standing around too early, which can be damaged if it stands there, or disappear, also.

So we really need to customize our supply chain to the customer needs and that can fluctuate. And when it comes to quarter, one week here or there, that is the swing factor we are talking about here. So it's really nothing beyond -- we have good visibility, because when we go into a quarter we have the backlog. We know when these products are scheduled to be delivered. There is a delivery date committed in the contract and then you just have small fluctuations -- nothing beyond that, really.


Erik Botnevik, Tomra Systems ASA - IR [18]


Then one question regarding collection. You have been quite specific on the revenue impact of the Swedish replacement demand. Is it possible to be a bit more specific on what you mean with fewer business opportunities in Germany in 2017 and 2018?


Espen Gundersen, Tomra Systems ASA - CFO [19]


I --


Stefan Ranstrand, Tomra Systems ASA - President and CEO [20]


That we -- sorry. Yes.


Espen Gundersen, Tomra Systems ASA - CFO [21]


I think actually we are very specific on Germany. What we're doing is showing the band. We also said that the two first year is high in the band and we said that the two next year will be lower in the band and then it's -- I think we are very specific. So please, I don't think many companies are as precise on our guiding as we are on that, or in our indications. I think you have to guess within that limited band.

Sorry, I'm --


Stefan Ranstrand, Tomra Systems ASA - President and CEO [22]


And to be very truthful, we don't know more. It's not that we are trying to blindfold anyone here. We don't have that outlook. We are -- in a quarter, for instance, when we come to the fourth quarter, every year, that's always a question mark for us. Normally, it historically comes better than we dare to think. But it could also be different.

It's the customer. When -- they decide, when do I want to replace the machines? There's quite an effort. It's not just to put in new machine. They have to take out the old machines. There might be some remodeling.

If you replace the back room, which is normally the case, that's quite an operation. They don't want to do it typical during high season times. Very often they will ask us to do that on a weekend, when they're closed. So maybe they close 10 o'clock Saturday night or eight o'clock Saturday night, and they open Monday, nine o'clock. We then have to be there and work through the night from Saturday to Sunday, during Sunday, and need to be ready to switch on, on the Monday morning. That's the kind of thing here.

So our team has a very demanding task, because it can be big installations that has to be replaced in a short time. But they have proven that they are capable of doing that, and that's maybe the evidence that we have this outstanding expertise in Tomra collections solutions. It's our heritage. Here we have a core focus and this execution power I think also contributes to our success in the market.

It's not only technology. It's also how we care about aftersales service, how we care about the installations. And this is just a little bit elaboration on why we cannot be more precise. We are basically as blindfolded as you are here. But we are positive. We don't think this is going down the drain. It's just a little bit slower than the last couple of years.


Pete Maun, - Investor [23]


Thank you. [Pete Maun], Investor. I just have a follow-up question on the Compac acquisition. Sorry for going back. But if you look at it from a strategic perspective, was this acquisition something that derived from a vision that you had and the Compac management had? Or was it a specific demand from large customers?


Stefan Ranstrand, Tomra Systems ASA - President and CEO [24]


Thank you for asking. This comes back to our vision and our strategy. You might recall that in 2011 we made our first entry into the food sector by acquiring Odenberg. Then the year after, in 2012, we acquired Best. So you can clearly see that we are the mover, the first mover, the consolidator in the industry.

We can see what's happening in the food industry. You see a growing demand for many new type of products. Just think, in the last few years how the demand for healthy food is just going up to the sky. When it comes to nuts, fresh fruit, super food and the like. And we see this. So we have learned a lot. We see these trends.

We also see this extreme consolidation. I think every year, an estimate 10% consolidation effect happens in the food industry -- food processing industry. So that the existing leading brands continue to buy for the brands.

What do they want? When we talk to them, they want partners, business partners, that are reliable, provide them a trusted partnership, trusted technology, for improve their economy and their environmental footprint. So if you think about that, they want to reduce the number of suppliers, but they want the fewer and better suppliers. That simplifies for them in their planning, because very often they have a multiple number of sites. They try to equip them in a similar way, so that they can produce the food product in a similar way, in order to provide a consistent quality.

If you go to McDonald's, it doesn't matter where you go. I think the Big Mac should taste more or less the same everywhere -- every place. And in able to do that you have to have a consistence in your processing. The type of raw material you use, how you process it, your specification of ingredients, etc. And there is where it comes in. To be able to support these companies globally in this.

So recognize it's consolidation. Recognizing this extreme demand for quality, for food safety, for consistency. That is actually driving the demand in industry, and on top of that, the new types of food and high quality food that is more and more sought after. Prices are -- people are not so price sensitive when it comes to high quality food. People are willing to pay a high price. And there is money to be made in the industry for providing that. That's really where we want to be, and that is the purpose of this.

Going beyond that there's also more to this, because today, we are very -- you can say providing leading product technologies, solutions, but they are very often in a value chain and that value chain actually starts from the farm and goes all to the plate. So then comes the question of traceability, of optimizing big data by making it more intelligence, applying artificial intelligence, by reducing food waste, reducing all of the products that have been farmed in an optimum way. It's a lot to do there.

If you just think of, like in the potato industry, I think we contribute to reducing the losses. We're at about 1%. That's a gigantic number for the industry. 1% in potatoes makes a big difference. And that's the kind of thinking we have.

But in order to be the leading here, and be the right partner, with trusted partnership, trusted technology, you need to have certain strengths. And on top of that, of course Tomra is a stable company, so we can also show them that here you have a partner which you can rely on, that will be also there in 10 years.

So this is really part of our strategic vision. And on top of that you know that we have one passion for being number one in whatever we do. Because we believe that that gives us a chance to be leading when it comes to developing solutions and also provide premium shareholder values, through price premium, through a better earnings by capitalizing on economies of scale.

So I think that hopefully explains to you why we are so focused on this. So, indirectly, we don't think that we are at the end of the hallway here. We will continue to look -- not right now, because I think now we have to show our history. We want to do a prudent job, so now it's about delivering on Compac. But then we will start process to see if there's something meaningful to add on to that.

We want to be a growing company, a meaningful company, that contributes to shareholder value, and contributes in an outstanding way to the industries we are in.


Erik Botnevik, Tomra Systems ASA - IR [25]


There is no more questions on the web.


Stefan Ranstrand, Tomra Systems ASA - President and CEO [26]


Thank you. That's good. With that, thank you very much for participating in this presentation. A good year on base of a super year. I think, take that with you. I mean, 2015 was an outstanding year, 29% growth in revenues, 37% growth in earnings, and we now managed to go on top of that, actually, better than we dare to think, when we went into the year.

And good order momentum in some sorting solutions. Growing orders in the year, 8%, growing in the last quarter with 20%. Six years in a row 20% EBITDA, or more in collection solutions. Leading market positions in everything we do. And having -- being seen as the technology leader and the market leader. I hope that it's food for further good years and quarters to come.

Thank you very much.