Buried within the dense financial jargon of TOMRA Systems ASA's Q1 2024 earnings call lies a fascinating story. It's not the continued strength of their Collection business, nor the anticipated rebound of the Food division. What truly captured my attention, and seems to have flown under the radar of most analysts, is the subtle yet deliberate construction of a "feedstock" empire, a play that could fundamentally alter the landscape of plastic recycling in Europe.

TOMRA Feedstock, classified as part of the company's Horizon ventures, is quietly carving a niche for itself, tackling a critical missing link in the recycling chain: the recovery of plastic from mixed waste. While TOMRA's traditional recycling business focuses on sorting already separated plastic waste, Feedstock dives headfirst into the vast and largely untapped reservoir of mixed waste, extracting valuable plastic that would otherwise end up in landfills or incinerators.

This isn't just a feel-good sustainability initiative; it's a shrewd business move backed by compelling regulatory and market drivers. The EU, in its relentless push for a circular economy, has set ambitious targets for plastic packaging recycling. The current Packaging and Packaging Waste Directive mandates a 55% recycling rate by 2030, a significant jump from the current 40%. This translates into a staggering need for an additional 2.5 million tonnes of recycled plastic annually.

The recently passed Packaging and Packaging Waste Regulation further intensifies this demand with its recycled content target for all plastic packaging, not just PET bottles as in the past. Calculations based on TOMRA's estimations of a typical feedstock plant's capacity (200,000 to 300,000 tonnes) reveal a mind-boggling requirement: 20 more sorting plants in Europe by 2030.

But the EU regulations are just one side of the coin. Brand owners, driven by their own sustainability pledges to double recycled content by 2030, are creating a massive 7 million tonne demand surge for recycled plastic. This translates into a staggering need for 35 new sorting plants, adding fuel to the feedstock fire.

TOMRA, with its decades of experience in sensor-based sorting technology, is perfectly positioned to capitalize on this burgeoning market. They've already made strategic moves, investing in two feedstock plants. A brownfield plant in Germany, 100% owned by TOMRA, is set to be operational by the end of 2025 with a capacity of 80,000 tonnes. A joint venture with Plastretur in Norway will add another, slightly larger plant by 2026.

Offtake agreements for the German plant, inked with industry giants OMV and Borealis, signal the viability and attractiveness of TOMRA's feedstock output. OMV will utilize the feedstock in their Austrian chemical recycling facilities, while Borealis will integrate it into their European mechanical recycling operations. These agreements, covering over half the German plant's volume, are just the tip of the iceberg.

TOMRA plans to further expand its feedstock network, primarily through strategic partnerships. Their illustrative cash flow projections for a large-scale greenfield plant offer a glimpse into the potential profitability of this venture. With a targeted IRR of 15%, a return on capital exceeding 50%, and an EBITA margin around 18%, feedstock plants are poised to generate significant returns while contributing to a circular economy.

What's even more intriguing is that TOMRA is playing the long game. They understand that a 3-year ramp-up period is typical for these plants, with steady-state production achieved only after that initial period. Their patience is evident in their cash flow projections, showcasing a breakeven point only after six years from the initial investment decision.

While analysts dissect the quarterly fluctuations of TOMRA's existing businesses, a more profound shift is taking place beneath the surface. The company is meticulously laying the foundation for a feedstock empire, poised to become a dominant force in plastic recycling. This silent revolution, driven by a strategic blend of technological expertise, regulatory tailwinds, and market demand, promises to redefine how we think about plastic waste.

The question now is not if TOMRA will succeed, but how large their feedstock kingdom will become.

TOMRA's Order Backlog (Recycling & Food)

TOMRA is experiencing a surge in order backlog for both its Recycling and Food divisions, indicating positive future growth prospects.

Projected Cash Flow of a Typical TOMRA Feedstock Plant

This graph illustrates the projected cash flow over time for a large-scale greenfield feedstock plant, highlighting the initial investment, ramp-up period, and eventual steady-state profitability.

"Fun Fact: The amount of plastic waste generated annually in Europe (32 million tonnes) is roughly equivalent to the weight of 100 Eiffel Towers! TOMRA's feedstock initiative is a crucial step in preventing this enormous amount of waste from ending up in landfills or incinerators."