Tomra Systems ASA (TOM) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to this analyst and investor call on our recent M&A transaction last night. We will start with a short introduction from Eva about the case, and then we're happy to take your questions. But I'll give the word immediately to Eva.

Super. Thank you, Daniel. Last night, as you saw, we acquired 80% of the shares in C-Trace, a German leader in the digital waste management solutions for a consideration of EUR 56 million and an option to buy the remaining 20% after 2 years. So before we open up for questions, I would like to add some more color to the deal to tell you some more about what C-Trace does, why Tomra wants to enter into this space and also facts about the company and some more financials. What does C-Trace do? So they provide data-driven digitalized solutions that combine software with vehicle sensor equipment such as RFID technology and AI for the waste management sector. This enables both smarter and more efficient waste collection for waste management companies, municipalities and their citizens. And it also helps to ensure compliance with stricter environmental regulations coming more and more in force. Why does Tomra want to enter this space? One, it's a good strategic fit for Tomra. We see commercial synergies and also, it's quite attractive when it comes to the financials. Why do we see a strategic fit? This is an adjacent play to Tomra, an adjacent because of their digitalization technology and because they operate in an extension of our existing value chain, positioning Tomra -- positioning today in Tomra and recycling in particular. It is also close to the core of our business with a strong strategic fit with our vision and desired positioning. It is a technology-driven business in a high-growth market within resource optimization. And our common goal is to increase collection and recycling rates. Then over to the commercial synergies. We see commercial synergies between the companies that can unlock further value creation over time. Through Tomra's customer base, global footprint, public affairs, but also technology development, we will look to accelerate growth in C-Trace's core business. And at the same time, C-Trace expands Tomra's digital capabilities that can benefit Tomra's core division then in particular, then recycling and collection. We see the digital waste management as a financially attractive market segment. And the reason is because it is delivering strong growth as waste collection is faced with stricter regulation, higher complexity and the need to use digital technologies to drive operational efficiencies. It is a market segment that has already proven commercial module with profitable players, but at the same time being fragmented and early in the market adoption process. It is also a market segment that has potential for significant innovation through technology that opens new cases and adoption in the future years. And why then C-Trace? It's because of its position, the financials and the culture fit for Tomra. C-Trace has a leading position in the market, specifically in Germany, which is the largest European market for its business. They have a solid proven concept and business model with strong track record. And this makes C-Trace as an ideal entry point into this market. The market itself is demonstrating strong growth and profitability and C-Trace have been profitable for a longer time. It has a limited CapEx profile and has therefore been cash flow positive for some time. C-Trace's strong profitability and cash generation supports then Tomra's financial targets. The company is one of the innovative players in the industry with new AI-driven solutions and capabilities. And they have a holistic solution offering a combination of software, service and hardware. And looking at the revenue, it's roughly split into 50% in equipment of hardware sales and then 50% is recurring revenue in the form of software and aftermarket sales. In total, C-Trace had EUR 21 million in revenue over the last 12 months. And revenue has grown close to 10% since 2020, but has had an acceleration over the last 2 years, currently growing above 15% annually. The company has delivered consistently strong profitability. The EBIT margin has over the last 12 months been around 23% after minor adjustment in the process that we have looked at. Depreciation and amortizations account for approximately EUR 1 million, where most of it is related to long-term lease liabilities for buildings and cars. And we estimate an EV over EBITDA multiple of just about 12 on a trailing 12 months basis. Regarding the immediate effect or impact on Tomra's reporting for Q4, it's important to consider that approximately 40% of the company's revenue and 60% of EBIT is typically taken in the fourth quarter. So it's really a backloaded business within the year, where we will be the owner for the last 2 months of that quarter. And I think, Daniel, we can stop there and then we can move into questions.

Do we have any questions from the floor? Please raise your hand and we're happy to take them. Great. I see Kari Hartvedt from Pareto. Please go ahead.

Yes. Sorry, I think I joined the call 30 seconds today. Did you say that the consideration was EUR 60 million? Or didn't you say anything about the consideration?

I said EUR 56 million.

EUR 56 million.

Yes.

Is it in cash?

So we are using our existing financing structure to pay for this company.

Yes. So you are paying in cash, not in shares?

And we pay in cash. Yes.

Okay. EUR 56 million for the 80%?

For the 80%. Correct.

Thank you, Kari. Next question from Markus Heiberg at SEB. Please go ahead.

So just on the rationale here and your opportunity to add value. Can you share more how you think these services could be incorporated into your existing recycling and collection businesses? What sort of makes this an attractive technology provider that you could sort of enhance and add to your offering? A bit more color on that could be interesting.

Yes. So it's mainly about -- so first of all, we move into this adjacent business. It's really in line with what we have said before. So this is a perfect candidate when it comes to both market growth and the profitability and kind of like the position that the company has and it's scalable and also where we can add value, right? And when it comes to the synergies, it's important to note that this case is not a cost synergy case for Tomra. This is really our main focus will be growth synergies, so the international scaling of the company, but also technology synergies. So for us, it's about leveraging the Tomra R&D and innovation capabilities to support C-Trace on developing new solutions, typically then on the AI, but also vice versa that we can learn from C-Trace in order to how they are deploying software. That could be, for example, thinking about collection, digital DRS, for example, is something that is really attractive to think about how we can add value from that in the future if that becomes more and more relevant. But also, we -- thinking about the value chain for recycling, this is then expanding the value chain of where we operate in the value chain and getting information about the waste as such in an earlier stage of a process can add value in where we operate today in recycling. So that we know what kind of waste comes in, in the MRFs, for example and how we can really track and trace and optimize the value potential in the waste for the rest of the value chain up until the production of new recycled -- or new production using recycled material. I'm not sure if that makes sense if you had any specific questions. Daniel, jump in as well.

I think that answered my question.