The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed TOMRA Systems ASA's issuer rating of A-/Stable. Scope has also affirmed the A- rating on the company's senior unsecured debt, as well as the short-term rating of S-1.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

The company's business risk profile (unchanged at BBB+) continues to reflect supportive industry dynamics, such as the legislative push towards a more circular economy and sustainability, particularly in plastics and packaging waste (ESG factor). Scope expects TOMRA to benefit greatly from this, given its strong market positions in Collection and Recycling. Despite the decline to well below 20% in 2022-23, Scope continues to view TOMRA's profitability, as measured by the Scope-adjusted EBITDA margin* (including capitalised development costs), as a supportive factor in its business risk profile. This is because Scope expects the Scope-adjusted EBITDA margin to trend back towards 20% following the completion of TOMRA Food's restructuring in 2024.

Historically, TOMRA's strong overall profitability has been supported by the profitability of Collection and Recycling, with reported EBITDA margins well above 20%, while TOMRA Food has had a dilutive effect.

Lower demand at TOMRA Food is due to weak market sentiment in fresh food. In addition, higher interest rates have lowered customer willingness to make new investments and created overcapacity at TOMRA Food, weighing on the division's profitability. In Q3 2023, the restructuring of TOMRA Food was initiated, which includes a reduction in headcount, the relocation of production from New Zealand to Slovakia, and the closure of a total of 11 sites. TOMRA plans to complete the restructuring in 2024 and to return Food's profitability to an EBITA margin structure of around 10%-11% by Q4 2024. Although TOMRA Food is going through a tough time in the short term, Scope believes that the drivers of the food business, such as the need for automation and increased quality and safety requirements, are intact and will support the business in the medium and long term. Overall, Scope expects TOMRA's Scope-adjusted EBITDA margin to recover significantly post restructuring in 2025.

The decline in the Scope-adjusted EBITDA margin in 2022-23 was mitigated by revenue increases. Consequently, Scope-adjusted EBITDA in 2022-23 declined only slightly to between NOK 2.1bn and NOK 2.2bn (from NOK 2.3bn in 2021). Scope expects 2024 to be more subdued after several years of strong growth due to: i) flatter revenue growth for Collection as fewer new markets are added in 2024; ii) softening demand but still low single-digit growth for Recycling; and iii) declining revenue for Food. Overall, Scope has factored in an unchanged revenue of around NOK 14.8bn in 2024. For 2025, the agency expects revenue to increase to NOK 16.0bn (up 8.0% YoY). Scope expects the Scope-adjusted EBITDA margin in 2024 to improve to around 16%, which corresponds to Scope-adjusted EBITDA of NOK 2.4bn, supported by the increasing impact of the Food restructuring towards Q4 2024. In 2025, there should be a further improvement in the Scope-adjusted EBITDA margin to around 18% thanks to the full-year impact of the restructuring measures. In combination with the assumption of higher sales, this results in an increase in Scope-adjusted EBITDA to NOK 2.9bn. There is upside potential from the Polish operation, which is expected to go live in 2025 and is only marginally reflected in the 2024-25 forecast due to the uncertainty of the go-live date. Poland is a large market with a population of around 37 million. When it goes live, it will be the second largest deposit market after Germany.

The rating continues to be supported by TOMRA's strong market positions, in particular in Collection and Recycling, bolstered by the company's technological knowhow, global reach and financial flexibility allowing it to undertake large implementations. Limited diversification due to the relatively focused product offering and limited diversification of end markets remains a restraining factor.

Scope's A assessment of TOMRA's financial risk profile is unchanged. This reflects the expectation that the elevated leverage seen in 2023 and also expected for 2024 will improve towards 1.5x after 2024, driven by higher revenues and enhanced profitability post restructuring.

Scope-adjusted debt* increased from NOK 2.9bn in YE 2022 to NOK 3.8bn in YE 2023 due to the increase in debt caused by the negative discretionary cash flow. The higher Scope-adjusted debt, combined with lower Scope-adjusted EBITDA, resulted in an increase in leverage from 1.3x in 2022 to 1.8x in 2023.

Scope expects discretionary cash flow to remain negative in 2024-25 due to expected increasing investments in new plants and throughput markets, resulting in Scope-adjusted debt climbing to around NOK 4.6bn in YE 2024 and about NOK 4.7bn in YE 2025. The agency believes that the expected higher Scope-adjusted EBITDA will dampen the increase in debt, resulting in a Scope-adjusted debt/EBITDA ratio in 2024 similar to the 2023 level. The projected increase in Scope-adjusted EBITDA in 2025 should improve the leverage ratio towards 1.5x in 2025, Scope expects.

Scope continues to view TOMRA's ability to generate cash flow as solid, supported by the highly profitable collection and recycling businesses. However, Scope-adjusted free operating cash flow (FOCF) has weakened significantly over the last two years due to the structural problems at TOMRA Food, net working capital-related outflows and increased investments. The decline in Scope-adjusted FOCF has led to a fall in cash flow cover from 63% in 2021 to 1% in 2022 and -0.1% in 2023, making it the weakest credit metric.

Scope does not expect cash flow coverage to return to pre-2022 levels. Although the assumed recovery in TOMRA Food's profitability should be positive for Scope-adjusted FOCF, this will be counteracted by the expected significant increase in capex due to investments in feedstock plants and throughput markets. Overall, Scope forecasts Scope-adjusted FOCF of around NOK -200m in 2024 and around NOK 415m in 2025 and sees cash flow coverage remaining negative at around -4% in 2024, only becoming slightly positive at around 9% in 2025. The agency continues to see interest coverage remaining very strong, at above 11x in 2024-25, supported by the assumed improvement in Food's profitability.

TOMRA's financial policy is credit-neutral.

TOMRA is not actively looking for M&A but may make bolt-on acquisitions or even larger acquisitions if interesting opportunities arise. TOMRA may consider some add-on acquisitions, especially in complementary technologies or in the food market.

Scope considers TOMRA's liquidity to be adequate as the company's available cash sources cover its short-term debt over the next 12-18 months from YE 2023 by well over 100%.

With an equity ratio of 42% at YE 2023, TOMRA had ample headroom under its financial covenant (>30%) for the revolving credit facility and export credit line. Scope expects TOMRA to maintain sufficient headroom under this covenant in its base case.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook reflects TOMRA's supportive industry dynamics such as the going-live of the new deposit return system markets in 2025, which drive TOMRA's revenue. It further reflects the expected recovery in TOMRA Food's profitability following the completion of the restructuring in 2024, with the Scope-adjusted EBITDA margin trending back towards 20%. It also reflects Scope's expectation that leverage, as measured by the Scope-adjusted EBITDA/debt ratio of 1.8x in 2023 and 1.9x expected for 2024, will improve towards 1.5x after 2024, driven by higher revenues and enhanced profitability post restructuring.

The upside scenario for the ratings and Outlook is (individually or collectively):

1. An improved financial risk profile, exemplified by Scope-adjusted debt/EBITDA sustained at below 1.0x

The downside scenario for the rating and Outlook is (individually or collectively):

1. Failure to meet Scope's expectations of an improving Scope-adjusted debt/EBITDA ratio post restructuring with Scope-adjusted debt/EBITDA remaining close to 2.0x in 2025

Debt ratings

The senior unsecured debt rating has been affirmed at A-, in line with the issuer rating.

The S-1 short-term debt rating has been affirmed, reflecting the issuer rating of A-/Stable, the company's strong short-term debt coverage and continued good access to bank and capital markets.

Environmental, social and governance (ESG) factors

Megatrends like climate change, resource scarcity, a growing population, a growing middle class and increased urbanisation have led to a legislative push towards increased circularity and sustainability, particularly within plastics and packaging waste. In addition, market demand for high-quality recycled material is fueled by commitments from brand owners to meeting their sustainability goals. As the current market leader with its technology, global reach and the financial flexibility to undertake large-scale implementations when required, TOMRA is well positioned to benefit from this favourable ESG-driven tailwind, particularly in the waste sorting and plastics recycling business.

TOMRA's activities are governed to a significant degree by legislation such as deposit legislation or legislation for packaging waste. Scope sees this as an opportunity, as the legal measures to reduce waste and reuse resources continue to be implemented and boost demand for TOMRA's products.

All rating actions and rated entities

TOMRA Systems ASA

Issuer rating: A-/Stable, affirmation

Senior unsecured debt rating: A-, affirmation

Short-term debt rating: S-1, affirmation

*. All credit metrics refer to Scope-adjusted figures.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 16 October 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings and Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Gennadij Kremer, Associate Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 23 June 2022. The Credit Ratings/Outlook were last updated on 2 June 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.