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Edited Transcript of AGLT.KW earnings conference call or presentation 19-Aug-20 11:00am GMT

Q2 2020 Agility Public Warehousing Co KSCP Earnings Call

Sep 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Agility Public Warehousing Co KSCP earnings conference call or presentation Wednesday, August 19, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ehab F. Aziz

Agility Public Warehousing Company K.S.C.P. - CFO

* Soriana Borjas

Agility Public Warehousing Company K.S.C.P. - Senior Manager of IR

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Conference Call Participants

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* Rita Guindy

Arqaam Capital Research Offshore S.A.L. - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Agility first half 2020 earnings webcast. My name is Ruby, and I will be coordinating today's call. (Operator Instructions)

I will now hand over to your host, Ms. Rita Guindy from Arqaam Capital to begin. Rita, please go ahead.

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Rita Guindy, Arqaam Capital Research Offshore S.A.L. - Director [2]

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Thanks, Ruby. Good morning, and good afternoon, ladies and gentlemen, and thank you for joining us today. This is Rita Guindy, and on behalf of Arqaam Capital, I'm delighted to welcome you to Agility's first half 2020 earnings webcast.

With me here today, Mr. Ehab Aziz, group's Chief Financial Officer; and Agility Investor Relations team.

Without further delay, I will now turn over the call to Soriana Borjas, Agility's Investor Relations Senior Manager.

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Soriana Borjas, Agility Public Warehousing Company K.S.C.P. - Senior Manager of IR [3]

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Thank you, Rita. Good afternoon, and welcome to Agility's first half 2020 earnings webcast. Before we start, and on behalf of Agility's management, I hope you and your families are keeping safe and sound in these unprecedented times.

With me on the call today is Mr. Ehab Aziz, our group CFO, who will walk you through the presentation as usual, the presentation you have available on your screen, after which we will open the floor for your Q&A.

(Operator Instructions)

Also, please note, as per the CMA circular that was issued back in March, requesting companies not to disclose Q1 financials, we didn't have our Q1 analyst call. But we will be covering this in this call, Q1, Q2 and first half of 2020.

Before I hand over the mic to Ehab, I would like to draw your attention to the disclaimer available on Page 2 as this presentation may contain forward-looking statements. Such statements are subject to risks and uncertainties. Please take a moment to read this.

And Ehab, over to you.

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Ehab F. Aziz, Agility Public Warehousing Company K.S.C.P. - CFO [4]

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Thank you, Soriana. Good day, everyone. Thank you for joining our earnings call today for the first half of 2020.

The first 6 months of this year have been extremely difficult. And every company around the world and every household have been trying to navigate through the challenges that the COVID situation presented to all of us. Agility is no exception of that. And I would like to start with highlighting how the COVID has impacted the company at a big picture, and then we'll drive through the numbers and then maybe address your questions and key concerns in the Q&A section.

So Slide 4 shows the global impact and how that impacted the different businesses that we have within Agility. And as you can see, the impact of COVID on Agility's numbers and Agility's businesses have been uneven. So we have some businesses like the Reem Mall, NAS, UPAC have been impacted significantly, while businesses like ALP, Shipa Delivery and some parts of GIL, particularly Air Freight, have been actually positively impacted.

So we entered this crisis as a company. And it's not foreign to us. Those of you who remember the 2008, 2009 crisis, we lived through very tough times at Agility, and we emerged stronger. And I think one of the key strengths that we have today is that we have a management team that has been going through difficult times in 2009. And just to refresh your memory, back in 2009, we also got impacted by the global financial crisis, but not only that, we got invited, as you remember, by the U.S. government. And then we also lost our biggest contract. And at the time, it seemed like the end of the world for the company. But I think we managed to navigate through that and we came out much stronger than before.

So I think we -- the management team today has been through difficult times. And I think we have the mindset, the expertise and the attitude to manage through difficult times to the best we can. And I think we are optimistic about -- relatively optimistic, I would say, about the outlook and about the -- how things should turn from here.

The second thing about the company is that we've always been staying a healthy balance sheet and healthy liquidity balance. So despite the significant CapEx program that we have been on for the past few years, we still have a strong balance sheet and strong liquidity position that is helping us navigating through the challenges of the COVID crisis.

The third point I would like to address here is that Agility today is a diversified group with different businesses. From my previous slide, yes, there has been some businesses that have been impacted significantly, but also some other businesses have been benefiting from the crisis. And we realize the importance of diversification geographically and business-wise. And I think that such crisis crystallizes the need to continue to diversify and accelerate the diversification process to be more resilient in the future.

We also have been investing heavily in IT, and that helped us to work from home. Most of our employees -- as you know, Agility is a large ship. Thousands of employees have been able to work from home and have been able to conduct their duties efficiently and effectively. So that also has been a key strength of the group. And then last, but not least, our commitment to sustainability has been emphasized and reinforced during tough times like the times we are going through.

Moving to the financial highlights in Slide 7. So group-wise, as I indicated, but it has been -- like the impact has been uneven. Some businesses have been impacted significantly like NAS, which is related to the aviation business; like UPAC, which is also related to the aviation business and commercial real estate. But also other businesses like GIL have been doing extremely well during the crisis. And as a group, as a management and as a company, we have been able to react quickly to the impact of the COVID and have been able to resize the organization, which I believe will have a positive impact on an ongoing basis once the impact -- the short-term impact of the crisis is over.

So in GIL, we had very strong Contract Logistics, Project Logistics and Air Freight. That has been extremely strong. Higher yields in Air Freight, primarily driven the results in Air Freight. Volumes have been extremely down year-over-year. But the yield has improved significantly. That was offset by a decline in Ocean Freight, as you will see later, but overall result for GIL have been positive on the top line. And also, I would say, significantly positive. Yet, they are not reflected in the numbers because of the cost measures GIL have been able to pay. So I'm very optimistic about that, and I'm very optimistic about the future of that business post crisis, provided things kind of normalizes, due to the measures and due to the discipline the management is putting in place.

On the infrastructure side, as I mentioned, the ALP, the Logistics Parks, there has been an increasing demand on facilities. I think our strategy has proven to be the right one, investing in that business 4, 5 years ago, significant amount of money have been going there, I think, has proven and will prove in the future that it's the right thing to do. There are a lot of moving parts in the logistics and the supply chain. E-commerce is growing, and all of that leads to demand for warehousing capacity. And I think we are very well positioned from an investment, from skill set, from management readiness to take advantage of that. So we are also very optimistic around that.

Tristar also has -- despite the decline in revenue, the net revenue has been positive. And also the shipping and the -- the turnkey contract have been also showing improvement year-over-year. The decline came from the fuel and the -- as a result of the decline in oil prices.

So high level numbers, the group revenue went down by 1.3% year-over-year for the 6 months. The net revenue has been down by 3.7% and EBITDA by 20%, and net profit has declined by 61%.

Moving to Slide 9. As you can see, the EBITDA reduction year-over-year, the 20% reduction year-over-year is coming from the infrastructure group. And that is mainly from NAS, UPAC, GCS as a result of the lockdown, as a result of the impact on the aviation industry. However, if you look at the GIL, GIL has shown -- despite all the challenges has shown a slight increase year-over-year. I would like to mention also that the numbers include about KWD 4.5 million of severance costs during the 6 months. And that is, by nature, mandatory. So we should expect that going forward. Of course, there will be further measures as and when the situation mandates. But we should expect some improvement on a run rate basis.

Moving to Slide 10. We continue to enjoy a healthy balance sheet with about KWD 2.2 million (sic) [KWD 2.2 billion] of assets and KWD 1.1 billion of equity. So a strong position. And the debt position has increased. However, net debt has actually declined to KWD 143 million versus the KWD 155 million as of the end of H1 last year. So there has been -- the net burn has been lower. Of course, the net debt-to-EBITDA increased as a result of the decline in EBITDA, not the increase in debt. So I think the net debt position and the debt has been managed quite relatively well during such a crisis.

You will see in the following slide on the cash flow that the operating cash flow has been positive, and the free cash flow has been positive. We have been diligently managing our liquidity and cash position during such difficult times. And I'm sure all of you have seen the squeeze in liquidity and the different focus in the markets and the different companies have been struggling to make their payment commitments. Despite that, we have been able to manage a net debt position that is lower than last year. However, our net debt-to-EBITDA metric has increased. But hopefully, as time improves -- things improve over time, the EBITDA will recover, and then we go back to a lower level of net debt-to-EBITDA.

We are -- as we have been always committed to all of our stakeholders, to our lending banks, we have been extremely engaged with all the banks, and we have been keeping them up-to-date with all the developments. And I think it's critical and strategic to maintain an open and direct dialogue with all the lenders in such time and in all times, not just during the crisis but more so during the crisis. So our commitment to the shareholders also remain there. We have reduced our dividends out of prudence. But I think as and when things improve, we'll resume our dividend policy back to the levels that we had.

And we also continue to invest in the business. So I mean, it -- sometimes, it becomes very difficult to maintain balance across these different stakeholders, but I think we have been able -- if you look from 2011 to 2000 -- before the crisis, we have been able to manage all the stakeholders during different times even during the crisis of 2008, 2009.

The statement of cash flow as -- I mean, we have been focusing on cash -- always focusing on cash, but I think in such crisis, this takes an extraordinary effort and focus from the management at all levels on liquidity and collection and credit risks -- managing credit risks. And I think, so far, in the first half of the year, we have been able to manage our liquidity position. So despite the decline in cash from operating activities before change in working capital, you noticed that there has been a positive change in working capital of about KWD 23 million versus a very -- KWD 40 million of last year. And as a result, our net cash from operating activities have increased significantly, 128% versus the same period last year.

Our CapEx has been managed and scrutinized, and that's why there has been delay or cancellation of some of the programs, but nothing major that -- in the big scheme of things, nothing major. So we continue to invest about KWD 47 million for the first half. So as a result of that, our free cash flow have been around KWD 44 million versus the KWD 17 million net over the same period last year. So overall, I think we have been diligent about managing cash, we've been diligent about managing our debt position. And I think so far, we have been successful in doing so.

Moving to Slide 13. A little bit of an insight of how each business performed, that's on the GIL. If we adjust for the currency impact, the revenue increased by 4.1% compared to last year. That was supported by a healthy performance in Contract and Project Logistics and also higher rates in Air Freight, as I mentioned before. And that's due to limited capacity and increased demand for urgent products, like the medical equipment and food supplies.

Both Air and Ocean reported a decline in volume due to the COVID situation and the lockdown and production stoppage and the economic contraction that we see across different industries and geographies. But in Air, net revenue has grown by about 17% driven by the -- so has been a positive development on Air Freight. Also good performance in Project and Contract Logistics. That was offset by lower yield in Ocean Freight and other services like Fairs & Events, which had a significant impact, as you can see, a decline of 46%. But Fairs & Events is a relatively smaller part of our GIL business today.

Contract Logistics did well mainly in Middle East region, in Kuwait and Saudi Arabia, but also in several countries in Africa -- sorry, in Asia. So -- and as a result -- and that was due to the additional new facilities, particularly in Saudi. Project Logistics also showed some strong performance across all the regions and showed a 25% year-over-year growth in net revenue. And this is primarily driven by CapEx projects and positive volume. But again, our GIL, 60% of our business in GIL is Air and Ocean, so -- followed by Contract Logistics. So Air, Project Logistics and Fairs & Events, the [building] might have big swings. But the net impact on all of -- the overall numbers of GIL would be not as significant as the movement in Air and Ocean Contract Logistics.

So net revenue, as I mentioned in our previous calls, is a better proxy to measure the performance of GIL. And in GIL, Ocean Freight and Air Freight represent about 60% of GIL. Originally, Middle East make about 32% of net revenue of GIL -- sorry, 26% of the GIL net revenue. And it's driven by Contract Logistics. Other regions have been affected by the general freight forwarding volume. But what I would like to mention here is that GIL, when we presented -- we got presented by the COVID situation and challenge of COVID situation and the potential decline and uncertainty about the business, I think the management has acted swiftly to manage the business and reduce its cost.

So what is important to note here is that net revenue and revenue of GIL is flat. But I think the cost structure of GIL has significantly changed due to aggressive measures taken by GIL management. And I think on an ongoing basis, we should start seeing some very positive performance of GIL, provided the market stabilizes and provided that net revenue start to grow again, not significantly, but a single-digit net revenue growth would be enough, I would say, to see some significant improvement in GIL's profitability.

So I'm very optimistic about the outlook of GIL. I'm very confident that the actions that have been taken so far would [enjoined] and should step change the profitability of GIL. And I'm hopeful that the market will stabilize maybe end of this year, maybe next year. Who knows how things will evolve from here. But once the market starts to stabilize, I think the impact, the profitability impact on GIL, given the measures we have taken, will be significant. And the business will start realizing its potential -- financial potential.

Moving to the following slide which talks about the infrastructure. As you can see, most of the businesses in the infrastructure growth have shown some significant year-over-year reduction in revenues, except ALP which grew by 4.5%. So the decline in revenues is driven by almost every entity. The decline of profitability has been significant also year-over-year. But I would say some of that is -- hopefully, it's temporary in nature, and we see some signs of recovery. So Tristar has been, despite the decline in revenue, profitability in Tristar has been relatively positive.

UPAC definitely got hit because of the commercial facilities, because of the parking in the airport which technically stopped. And then as the things start to recover and things start to open up that decline is reducing, and we see some improvement in UPAC. So hopefully, within the next few quarters, things will recover back to where it was before the crisis.

NAS has taken significant amount of cost actions to mitigate the 29% in revenue. We see some stability now and we see that the business is due to the cost -- actually due to some volume improvement relative to what we had in H1. Things start to recover and things start to improve from that.

GCS, as the lockdown happened, many inputs have not been coming through the country in Kuwait. And as a result, revenues have gone down to 20% -- by 21% year-over-year. Again, we see some improvement. It used to be -- in certain months, it was more than that. And now we see a recovery going forward. So we are hopeful that these businesses -- this is temporary in nature. That's the hope. We have acted on the cost side. Now hopefully, the business will recover with the easing of the lockdown and the resumption of some flights and the airport starts to open up. And then hopefully, things will go up again to where it used to be before the crisis.

So this is my last slide before we get into the Q&A. And again, this is a symbolic slide. I think just to frame what we have done and how we think about this, I mean, we have to respond. We have to react to a reaction to a situation that is extremely difficult to everyone. And I think we have been relatively successful responding to the challenges and reacting to the challenges that we have been faced with. We are not yet out of the woods, and we are not yet done with the crisis. But I think we have the means and we have the foundation to manage the situation as best as possible.

Then I think -- the way we think about it, if we want to get out of this crisis better, and we want to get out of the situation stronger than before the crisis, and I think we'll go through a recovery and hopefully, in the next few quarters, there will be some recovery. And then we want to continue all the growth. And those who have been with the company and have been monitoring and watching the company going through the crisis of 2008, 2009, we went through a similar cases and similar situations where we had to manage the situation, then we had to solidify the base and then grow. And I think we have been doing relatively okay growing the company over the past several years consistently and systematically.

So we hope that the situation will be the same. Our mindset is that we want to get out of the crisis stronger and better. And we have been acting accordingly to, basically, achieve that.

With that, I think I will address some of the questions you have. I'll read through it and then address them one by one.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Ehab F. Aziz, Agility Public Warehousing Company K.S.C.P. - CFO [2]

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So one question about the decline in rent. And if it's -- is it reasonable to assume that UPAC contributed to the decline in rental income?

Yes, that is one of the main reasons why the -- on the headline in the balance sheet and income statement, you would find rental income going down. And that's mainly due to UPAC contribution. So that is -- the answer is yes.

Is the cost saving related to GIL more structural in nature or it's one-off? Can you please also provide some guidance on GIL CapEx going forward?

It is a combination of structural and one-off. But our focus is to make as much as possible, more structural and more permanent in nature. And as I said, I mean, we are still working through, we are not yet done with the progress on GIL. But I'm very optimistic today that with the measures that have been taken, whether it's permanent or temporary to -- like, for example, travel expenses have been significantly down. That's a temporary reduction in cost. However, the mindset is that once things go back, that expense will be managed diligently, more diligently and more -- things like restructuring some of the functions within GIL, accelerating some of the finance transformation initiatives. These are more structural and more permanent in nature. And I'm very optimistic that this within the next 2 to 3 years will yield significant upside potential for the GIL business.

The guidance on GIL CapEx. GIL CapEx is probably going to be in the neighborhood of 0.5% of revenue, maybe 0.75%. But it's nothing major, nothing significant at this point of time. It's mostly maintenance CapEx. Some of it is investment CapEx, but nothing significant there.

For GIL, also another question, how should we think about GIL EBITDA margin going forward? Is Agility still considering inorganic growth strategies for GIL?

I think the margins should improve and should -- you should see some margin improvement once the net revenue and the revenue stabilizes. And I think we are in a period where there is a lot of uncertainty, and it will take time for that to normalize. But directionally, EBITDA margin and EBIT margin and conversions should be going down as a margin. So we see both. We see growth in the absolute numbers, but also improvement in margin.

Is Agility still considering inorganic growth strategies for GIL?

That is, I think, a core part of the objective of -- strategic objective for GIL. And that is driven by the necessities of the market and the realities in the market today in that space. We talked about this in previous calls and when we were considering the Panalpina merger, it is, in my view, a necessity. It's not -- I think it's not something that -- you still can do things to a certain extent without -- organically without an inorganic transaction. But end of the day, to get to the next level of profitability, I think we will need scale and we will need cost synergies. The question is how can we achieve that. And there is very limited choices in that space. But we are actively looking and we are actively trying to identify things that we can do in that space.

I'll just try and read these through. Is there an element of fixed contracts within NAS and GCS revenue? Not really. No. It's a service-based, and it's a volume-based business.

So there is a question about also how we should think about recovery. I think -- for NAS and GCS, I think we expect a recovery probably around -- I mean, maybe Q2 next year. But it's up in the air, right? No one can really identify how things will move from here. But our internal thinking is that by Q2 next year, Q3, we'll go back to -- but not necessarily the same level before the currencies, but to reasonably, good level in terms of volumes and revenue. But given the amount of cost actions that have been taken, I think the impact on profitability should be much better by next year.

There is another question about Contract Logistics will deplete the growth in GIL business. Yes, I mean Contract Logistics is today in GIL, in terms of net revenue, is the largest product. So if you split Air, Ocean and Contract Logistics, Contract Logistics would probably be the largest contributor. And it has been growing at the high single-digit growth. And we see that continuing in the near term.

In terms of margin, the margin on Contract Logistics is much higher. It depends also on the region. A typical freight forwarding business margin is like maybe 4% or 5% EBITDA margin. Contract Logistics would be slightly higher than that, given adjusted for rentals because some of the assets of GIL are owned, but most of the assets are not owned. So if you adjust for that, the margin is higher in Contract Logistics. It's probably high single-digit margin compared to the 3% to 5% margin in Air Freight and Ocean Freight in a normal situation, not in today's environment.

How much -- okay, so the question about -- just trying, sorry, to read through the questions, they keep coming at the top. So there is a question about e-commerce. How much income it's helped during the lockdown and does it still continue to add value? And question two, could you please elaborate on the recent improvement seen in NAS?

Okay. So e-commerce, contributed directly and indirectly. So we have been investing in Shipa, as you probably know, and we have seen significant increase in volumes and demand and numbers. And I think we have been taking advantage of that. The issue here is that Shipa contribution, relative to the group, is smaller. So you would see a significant impact. But I think over time, that contribution will increase, and strategically, it adds tremendous value to the value proposition the group is offering to its customers.

Also indirectly on the ALP side, we are getting significant number of inbound requests for build-to-suit facilities or facilities in different markets. So we see it, and it's definitely increasing, and we see the potential of it. And I think we are very well prepared as a group to take advantage of the increased demand for e-commerce.

But NAS, I think I have addressed that. I think volume started to improve. Yet to be seen how things will go from here. It depends how the airports, when and how it will open up. But I think overall, things have improved. NAS has cut significant cost, and now it's ready for the resumption of normal level of business.

Performance of GIL infrastructure during July, I would say, very strong performance on GIL. Extremely strong performance. In infrastructure, I see a recovery, so it's not declining anymore. It's not like -- it's stabilizing and started to go up. ALP has been extremely positive all along. NAS is recovering from...

Okay some more questions. The capacity. Have one a bit on capacity, additions in Kuwait, Saudi and Africa for ALP.

One thing we did not stop when it comes to CapEx is the -- increasing the capacity. And we are increasing capacity in Kuwait and in Saudi and in Africa. So today, this quarter, the 3 sites that we have in Africa will be operational. So there would be -- the facilities will be handed over. Ghana has been already operational. Côte d'Ivoire and Mozambique will be online in Q3. And then I mean we see increasing demand in Saudi as well as in Africa and Kuwait. And I think this is one of the challenges that we have is, how can we continue to finance the ALP business without burdening the group or without burdening. Because as you can imagine, ALP business is a capital-intensive business. But we see how promising -- demand has been extremely resilient. And we expect demand to even increase. So we are very well positioned to take advantage and very bullish about that business in the short and the long term.

The company plan with regards to Reem Mall. I think it's -- the plan for Reem Mall is to persevere. I think we know that the investment is still a reasonably good investment despite all the challenges. We still live in the Middle East where there are very limited choices for people to do during -- there aren't many outdoors activities. And I think we are uniquely positioning the mall as an e-commerce play and as a technology play. And I think it will be unique in its position to all the stakeholders. And we are focused to deliver and execute on construction, on meeting our financing obligations and on the leasing program. And we are hopeful and confident that this would pay off in the medium and the long term. In the first term, definitely, there are many challenges. But I think over time, that asset will be a relatively good asset.

Okay. Okay, another question about Reem Mall, about the status of Reem Mall, I addressed that. Help me understand the shareholding pattern of the mall. The shareholder pattern, I think we disclosed it, it may be confusing. But Agility has -- through UPAC, has an equity stake. That is about, if I'm not mistaken, less than 20%, maybe 19-something percent in the mall. And then most of our investment is through convertible debt. So Agility shareholders will have the right to convert once the mall is completed -- within 2 years from the completion of the mall. So we'll have the option to convert it to equity or keep our investment of that, other than the 19-plus percent that UPAC holds. So that's, in essence, the ownership structure as far as we are concerned.

Another question about ALP. The new warehousing project in Kuwait, any insight into MLAs, revenue contribution. Is the margin you find similar? Again, we continue to invest in ALP in Kuwait, in Saudi and in the 3 countries in Africa, and we are considering other cities in the region and outside the region. But I think this is a business that we are very comfortable, and it's very resilient. It has proven that in good times and bad times, it is resilient. And I think managing the operational -- we have the means and the capability and the management team and the competencies to manage the different challenges, whether from the development phase, the financing. And I think that is something that we'll continue to do.

I can't give you by what is the margin from that warehouse. But overall, it is -- every investment we do in ALP is accretive. And as you have seen over the last several years, rental revenue has been growing and the margin has been, I would say, extremely, extremely well. So this is a business that we don't unfortunately disclose margins by business or by facility or by country for ALP, but I can assure you that the margins and the returns on that investment in that business is extremely lucrative. And I think we are -- that's due to many factors, but we have a very prominent position in the markets we operate in. And I think we have a leading edge when it comes to executing and delivering quality facilities that meet customers' requirements.

I think I have addressed most of the questions. I'm sorry, if I have not addressed any of the questions, but the list keeps moving. So I believe I have addressed most of the questions, if not all. If not, you can send us any questions on the IR e-mail, and we'll be more than happy to address them.

With that, I would hand over back to the operator.

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Operator [3]

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Thank you very much. Ladies and gentlemen, that concludes today's webcast. Thank you for joining. You may now disconnect your lines.