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Edited Transcript of AR4G.DE earnings conference call or presentation 29-Oct-19 1:00pm GMT

Q3 2019 Aurelius Equity Opportunities SE & Co KGaA Earnings Call

GRUENWALD Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of AURELIUS Equity Opportunities SE & Co KGaA earnings conference call or presentation Tuesday, October 29, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dirk Markus

AURELIUS Equity Opportunities SE & Co. KGaA - Co-Founder, Founding Partner, Chairman of the Executive Board & Group CEO

* Matthias Täubl

AURELIUS Equity Opportunities SE & Co. KGaA - VP & Member of Executive Board

* Steffen Schiefer

AURELIUS Equity Opportunities SE & Co. KGaA - CFO, Member of Management Board & Member of Executive Board

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Conference Call Participants

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* Alina Koehler

Hauck & Aufhäuser Privatbankiers AG, Research Division - Research Analyst

* Christoph Blieffert

Commerzbank AG, Research Division - Equity Analyst of Financials

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the conference call of AURELIUS Equity Opportunities SE regarding the presentation of the Q3 results 2019. At our customers' request, this conference will be recorded. (Operator Instructions)

I will now hand you over to Steffen Schiefer, CFO of AURELIUS group, who will start the meeting. Please go ahead.

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Steffen Schiefer, AURELIUS Equity Opportunities SE & Co. KGaA - CFO, Member of Management Board & Member of Executive Board [2]

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Yes. Hello, everybody, and a warm welcome to all of you to our today's 9-month earnings call. I'm here with my colleague, Matthias Täubl.

Let me give you a short overview of AURELIUS' highlights in the first 9 months of 2019. First of all, with SOLIDUS, we closed our largest exit in AURELIUS history with an enterprise value of EUR 330 million in the last quarter and an earnings impact of more than EUR 100 million.

Two more successful exits are already signed and will be closed in the next quarter, which is the sale of Scandinavian Cosmetics and Office Depot CEE business. Matthias will give you some further insights to our deal activities in a few minutes.

Also on the acquisition side, we were very active. We acquired Rivus Fleet Solutions, the former British Telecom Fleet solutions, already closed in September 2019, so which is part then for the Q3 figures; MPRO, YouBuild with closing in early October; and Armstrong Ceiling Solutions, which we bought from Knauf, which will be closed in early quarter -- first quarter of 2020.

The total consolidated group revenues amount to EUR 2.7 billion. Annualized revenues on a 12-month basis are at EUR 3.4 billion. EBITDA of the combined group quintupled to EUR 187 million due to our successful transaction activities.

For further information to our deal activities, I hand now over to Matthias.

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Matthias Täubl, AURELIUS Equity Opportunities SE & Co. KGaA - VP & Member of Executive Board [3]

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Thank you, Stefan. Matthias Täubl here, also a very warm welcome from my side to today's call.

I will give you some more color on our recent development in our portfolio, where one of the major events for sure was the sale of SOLIDUS back in June 2019, which has been sold for EUR 330 million EV to Centerbridge Partners, typical AURELIUS case with the reconcept which we did deploy to these companies, the reconcepts for cost down, revenue up. Not really sophisticated, not rocket science, but finally, this is what restructuring and turnaround is about.

It started with the carve-out from Smurfit Kappa previous parent of SOLIDUS, the rebranding restructuring, including a EUR 20 million reduction of the fixed costs. And on the other side, we did put in place a quite extensive program for growing the business. Again, lots in addition, supported and accelerated organic growth [about 5 3] add-on acquisitions which we have done.

So in total, the EBITDA of this business has been quite troubled from EUR 12.5 million back in 2015 to a run rate of approximately EUR 50 million and to date with the disposal.

On the acquisition side, we have been quite busy in the last couple of weeks and months as well. Rivus, Steff mentioned already, former BT Fleet Solution, is the U.K.'s largest commercial fleet management business headquartered in Solihull, which is next to the Birmingham. 950 employees, 65 garages nationwide in the U.K., and they're offering end-to-end service solutions for 80,000 cars all over the U.K. So for example, like registration, repair, MOT, which is the annual test of safety and roadworthiness. And recently have also started to implement some new services like, for example, accident management, eco-funding, and then invoice management.

What is the special situation here? Why do we think this is a good fit for AURELIUS? BT as the previous owner is focusing on connectivity and services with further investment in fixed and mobile networks. They have, therefore, enrolled different programs, such as full fiber and 5G. But at the same time, the fleet did and will also form a very important part in future service offering and service recognition in the future as well. But therefore, it was important for them, even BT Fleet was not core anymore, that they will find a reliable partner for the upcoming years as well, and somebody who is able to cover the complex divestment process without any interruption for the business. Given the track record of AURELIUS as a carve-out specialist with currently more than 90 specialists in all the different areas, we will support carve-out improvement. This is why BT and ARELIUS had come to an agreement here.

What we will do? Where do we see the opportunity of this company? First of all, it's about in the upcoming months and weeks, we will mainly focus on the carve-out from BT, making sure that this child can run on its own feet, and rebranding needs to be completed. That's been started already as you can see. And in parallel, we will put an quite extensive improvement and restructuring plan in place. For example, it's about increasing the productivity. For example to sold -- which means to sold hours per person per day where we do see but we have seen already throughout the due diligence when we do the benchmark with some of the main competitors that there is some room for improvement left.

Another example is optimization of the garage footprint, the increased use of mobile technicians and, of course, also the digitalization of all the processes. These all together, we are quite optimistic, should also leads to a situation where we can significantly improve the pricing. And this should then build the basis for organic growth of this business, so mainly focusing on blue-chip customers in the U.K. besides decrease of BT managing already. And so we will also invest from a growth perspective in (inaudible) vehicles, accident management vehicle funding, invoice management to really offer a comprehensive end-to-end solution for the blue-chip customers out there.

This has been proven already that Rivus in general is capable to do so, which was recently announced that Rivus has won, in the last couple of weeks, 2 main new contracts already with Kier Group with a total contracted value of GBP 39 million, and Highways England with a total contracted value of GBP 4 million, which will contribute positively due to coverage of the cost in the near future here as well.

We're talking today about a company of EUR 220 million revenue in size approximately with a positive EBITDA. But comparing and benchmarking it with other players out there, by far, not where it could be from an EBITDA-percentage perspective. Once we have implemented what I have just outlined and also maybe in support to growth of the business by inorganic and bolt-on acquisitions, we do feel quite comfortable that we can bring this to both markets, average percentage from an EBITDA perspective.

The same applies for another company we have acquired. It's MPRO and YouBuild. It's building materials merchant group in Belgium, which is selling heavy construction and construction products in general to construction companies in Belgium but also to (inaudible) which forms quite an important group in the customer landscape. They are headquartered in Brussels. 240 employees run about 16 branches, mainly whereby YouBuild is focused on West Flanders, and MPRO on the Wallonian, on the French-speaking part of Belgium?

What is the special situation here? Again, Grafton, the Irish-based conglomerate decided a couple of months ago that they will focus on their core markets in the U.K. and in the Netherlands. They have started some 10 years ago to invest in Belgium for the joint venture, then they have taken over the remaining shares as well. And finally, they ended up with 2 different brands, MPRO and YouBuild, 2 entities not fully integrated. And they were thinking about, okay, shall we now focus more on our core markets and whether they are doing quite well in U.K. and Netherlands? Or shall we really -- or shall we also in parallel, take care of the Belgian market as well and starting integrating these 2 different entities? They decided, no, it's not core any longer. They will focus on their core markets. And this is why, again, they were looking for a reliable partner for the carve-out process and then it could come for these 2 companies.

What we will do to this company? Again, carve-out, I think, is something which should be done in the upcoming months. This is something where we are used to it where our colleagues from the functional experts has proven in the past, this is something which we can fulfill without any interruption for the business within a couple of months' time.

Optimization, we do see a lot of different ones. Main one I've just outlined already is, of course, the integration of the back office and the IT landscape to drive the synergies between these 2 different companies and entities, which also gives them the possibility as a proper platform and solid base to do stock optimization, currently in discussions already with different buying groups and to optimize the margin. One of the bigger levers will be that we will start implementing a private label products program in the near future as well, category management. So everything you can think about if it comes in materials merchant group.

Also from a growth perspective, we have defined some measures here already. For example, we will implement new services like [dual hiring], with focus on special products such as timber, for example, in different branches. And also, we will expand the geographical footprint. So already in this year 2019, we will open 2 additional hubs and satellites. And next year, we have contracted 4 additional satellites already, which will give the company a much more comprehensive footprint.

Again, we are talking about EUR 100 million in size, revenue-wise. As of today, profitability by far below market average. And I think I feel comfortable, again, thinking about all the different levers we have in place here that we can bring it to an above-market average EBITDA margin in the near future.

Different company, similar industry. On Page #8, Armstrong Ceiling Solutions, which we acquired from Knauf just recently, which is a manufacturer of suspended ceiling tiles and grids for commercial buildings. Like for example, for the Tottenham Stadium just recently opened in London, located in Twin Valley which is next to Newcastle. We are talking here about roughly 230 employees. And also in addition, besides the production facilities in the U.K., they have sales capabilities across 11 European markets.

The special situation here? Or why did Knauf choose to sell it and to sell it to AURELIUS? Knauf did acquire the global Armstrong Ceiling business some 2.5 years ago. And after reaching out to the European Commission, asking for the merger clearance, the feedback is it took some while until the feedback was that European Commission will deny this request. And so therefore, it was quite important for Knauf to find a quick solution for this European business and a reliable transaction partner. Again, as this was very integral with the remaining bits and pieces and parts of this business, which will pay with Knauf, the carve-out process standing in a proper way and in a professional way so that it will not lead to any disruptions either on the European business but also for the remaining global business as well.

I think what we have seen and discussed with the management, what we have seen throughout the due diligence is that there is some opportunities around this goal to improve this business further. For example, we have seen some opportunities there when it comes to how we buy the raw materials. It's -- for example, the allocation of work between the 2 production facilities, but also from a growth perspective, better engagement with the 3 main distribution channels. So one is the project works, like, for example, the Tottenham Stadium, I mentioned before. Second one is distributors and certain other construction firms. We feel comfortable that we -- based on a better engagement with the 3 channels and will drive the top line to north as well.

And in addition, there is a quite substantial and large installed base already, which leads to a recurring revenue stream for Armstrong, and I think this is something where we can build on.

Same situation, again, all the 3 deals I mentioned so far, which we have acquired all positive EBITDA territory, but all -- but where it could be. So we think all the 3 deals will contribute in a positive way in the upcoming months and years when they belong to areas in a positive way to our numbers, which Steffen will talk about in a minute.

On the exit side, we have been successful here in the last couple of months here as well. Office Depot Europe, so the CEE business has been sold to PBS Group, a strategic buyer headquartered in Austria, with an existing footprint already in the Czech Republic and the Slovakian Republic, that they will be able to take it to the next page and into the next level.

As you all know, and as we have outlined in the past already, Office Depot is composed of 3 main business units. We have the writing business, which is servicing the SMB customers through online and catalog channels. We have the contract business as the second pillar, which is focusing on larger businesses and the dedicated sales force. And the third pillar is the retail outlets.

All of them are in a slightly different stage when it comes to transformation. For all of them, what we are doing is transition to or trying to transition to full online service model. We are focusing on high-margin categories and also expand high-value services, such as, for example, managed.com services for the different business units. The same has been done to the TE business here as well. So therefore, it was quite developed from our point of view, slightly ahead of the other business units. And this is why it was the right moment for us to sell it and to pass it on to somebody where we have found with PBS' request of reliable partner for the future of this business as well.

Another exit, which has been achieved in October this year, last month was on the sale of Scandinavian Cosmetics, a business which we have acquired back in 2015 from the Swiss Valora. That was a division which was consisting of an FMCG activity. So that they connect us straight into cosmetics business, so Scandinavian Cosmetics. Again it was a business which was not core activity anymore for a big multinational company, Valora. It has a complex legal and organizational structure due to the combination of the 2 different businesses. So FMCG business not necessary do a lot with the cosmetics business. And so what we have done is after the carve-out from Valora, separation of these 2 different pillars and established for Scandinavian Cosmetics and pan-Nordic structure, has implemented an e-commerce transformation, category expansion. Geographical expansion also entered the Danish market and have also launched a performance improvement program.

All this together, it leads to a significant improvement in the bottom line EBITDA-wise and therefore will result from an AURELIUS Group perspective doing positive earnings impact of around about EUR 15 million to EUR 20 million in the fourth quarter once the deal has been closed.

If you have a more generic look on our portfolio, where we are as of today, a very famous chart. On the bottom line on the x-axis, you can see state of when the company has been acquired by the AURELIUS. On the y-axis, you can see where it is currently in the stage of maturity, so from improvement to optimization and growth. What we can see is a very well-balanced portfolio by stage of development and from a geographical point of view, by industry, by size. So therefore, we do feel quite comfortable that these companies will contribute very positively in the upcoming months and years. We will see some further exits. Also, it looks quite good at the moment, likely the pipeline that we will see further companies arriving in the near future.

By nature, the companies outlined here will move from the right-hand side to the left-hand side as they belong to AURELIUS. And normally, what we have seen in the past, if they will move from the bottom to the top from the improvement phase to the optimization growth phase. And I think that's the important message here that we can see that all of the companies moving up once they belong to AURELIUS over the years.

And so therefore, I would like to hand over to Steffen again, who will lead you through the numbers in more detail.

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Steffen Schiefer, AURELIUS Equity Opportunities SE & Co. KGaA - CFO, Member of Management Board & Member of Executive Board [4]

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Yes. Thank you, Matthias, for the detailed information about our deal activities. I will give you now a short overview on our financials, and at the end, a short outlook for the upcoming months.

I'm on Chart 12 now. The total group revenues of AURELIUS are slightly below last year level and amount to EUR 2.7 billion. The annualized group revenues from continuing operations increased by 1% to EUR 3.4 billion.

So let me give you a few explanations to our EBITDA and the 3 sources of value creation. So the first part of our EBITDA is the operating EBITDA of our group companies, which shows the result of the ongoing operations. Operating EBITDA for the first 9 months 2019 amount to EUR 135 million after EUR 80 million in the first 9 months 2018. The EBITDA development was influenced by a good operational performance but also from the first-time application of IFRS 16, the new IFRS standard for lease accounting, which is mandatory since this year.

The second profit contributor is the bargain purchase, which is an inherent part of the AURELIUS results. So bargain purchase income is being achieved when AURELIUS acquired portfolio companies with a purchase price below the book value of the acquired equity. Bargain purchase amount to EUR 15.4 million after EUR 12.8 million last year and is related to the first time consolidation of Rivus Fleet in Q3.

So bargain purchase is a contribution, they are willing to make towards future restructuring expenses in order to get rid of a business. So restructuring expenses at a radius amount to EUR 61 million, which is nearly on the same level like last year. There was -- that we had a number of EUR 58 million.

Third element is the exit part and is related to the sale of our portfolio companies. Results from sales of our book value amounts to EUR 98 million, which is mainly driven by our very successful before mentioned exit of SOLIDUS. In the first 9 months 2018 realized a gain of EUR 3 million.

Short outlook into Q4. Matthias just mentioned, the exit of CEE, Office Depot and Scandinavian Cosmetics. You will then realize an additional further exit result after closing of those exits in Q4. Cash increased from EUR 291 million at the end of 2018 to EUR 312 million at the end of September 2019.

The equity ratio amounts to close to 20% after 25% last year. The only reason for that decrease is the before mentioned first-time adoption of IFRS 16, which leads to a higher assets but also to higher leasing liabilities and, therefore, a new relation of equity and total liabilities.

Let's move on to our NAV. I'm on Page 13 now. So net asset value of the portfolio at the end of September amounts to EUR 1.24 billion after EUR 1.4 billion, end of 2018. The decrease is related mainly to the dividend payment in July and some adjustments in the retail business. The NAV is based on a DCF model. For the NAV calculation at the end of September, we used our Q3 actuals and our 3-year budget from last year. So the used growth rate for the terminal value is still on a very conservative level of 0.5%.

For listed portfolio companies, which is currently only HanseYachts, we use the respective market cap instead of the DCF valuation. The WACC is based on a respective individual peer group. And as of September, there was also spread between 5% and 11%, the average is still around 8%.

The second table on that chart shows the NAV by maturity or vintage clustered by the holding period of our portfolio companies. As you can see, the main value of our portfolio companies comes from the older and the already developed companies. More than 80% of our portfolio NAV is related to the major ones.

Our last chart for today, that will give you a brief outlook for the upcoming months. Let me give you a short overview about our deal activities. The actual deal pipeline is strong. We see some opportunities for the near future, what it means for Q4 and also for the first half year of 2020. All in all, we expect further platform investments during the next month. In Q4, 2 exits will be closed. Matthias just gave you a few explanations on that. It will be Scandinavian Cosmetics and the Office Depot CEE business, which will have a further positive impact on our P&L. Closing of our platform investment Armstrong from Knauf is expected for the first quarter in 2020.

So we still pursue our way to develop the value enhancement of our portfolio. And after a turnaround phase, which needs in an average 12 to 18 months, we are focused on the optimization and the organic growth of our portfolio companies. Besides organic growth, we've developed and strengthened our portfolio by a strategic add-on acquisitions. Good examples for that, are our add-ons for hotel, and in the past, for (inaudible). Acquired a considerable number of portfolio companies already developed to market maturity as you also can see on Chart 11, Matthias gave you just some further explanations a few minutes ago.

If you talk about market maturity, we should talk about further exits. We still see a strong exit pipeline. So our planned exit projects are still on track, and we expect further profitable exits within the next 2 or 3 quarters.

Thanks to all of you for listening, and we are now happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Alina Koehler of H&A.

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Alina Koehler, Hauck & Aufhäuser Privatbankiers AG, Research Division - Research Analyst [2]

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I have 2, actually. One would be how large is the IFRS 16 effect on the Q3 EBITDA, like approximately? And the second is could you give us a little bit more color on the NAV development of each segment?

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Steffen Schiefer, AURELIUS Equity Opportunities SE & Co. KGaA - CFO, Member of Management Board & Member of Executive Board [3]

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Thank you, Alina. I think the 2 questions from my side. So NAV development is just as we expected, so stable, especially for the IP, industrial production and service and solutions. We had some minor adjustments in the retail business related to the actual overall business in the retail business in the U.K., but also in Western Europe, so there we had some minor negative adjustments. And the second one was IFRS 16, the effect there is in the high 60s for the first 9 months.

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Operator [4]

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(Operator Instructions) The next question is from Christoph Blieffert from Commerzbank.

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Christoph Blieffert, Commerzbank AG, Research Division - Equity Analyst of Financials [5]

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I would like to come back to the net asset value, and maybe you could help me understanding the movements in the other line, please.

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Steffen Schiefer, AURELIUS Equity Opportunities SE & Co. KGaA - CFO, Member of Management Board & Member of Executive Board [6]

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Thanks, Christoph, for that. So we have a plus in the other segment or in the other line item of nearly 70. There are a combination of multiple reasons for the development. So own shares are -- the treasury shares are, at the end of June, were a little bit higher than in Q3. So that had a negative impact. We had some cash investments in new subsidiaries in Q3, for example, the before described Rivus fleet acquisition, which was closed in September 2019. We had some investments, growth investments in the portfolio. So we provided some cash into our operating portfolio companies from KGaA. And there was a minor amount for the disposal of the SOLIDUS brand, which is headed by GIP. This is our brand owner company located in Luxembourg. So that was also a small impact on that side. So a combination of multiple reasons for the development of this.

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Christoph Blieffert, Commerzbank AG, Research Division - Equity Analyst of Financials [7]

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Okay. You have said you have quantified the IFRS 16 impact of some EUR 60 million.

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Steffen Schiefer, AURELIUS Equity Opportunities SE & Co. KGaA - CFO, Member of Management Board & Member of Executive Board [8]

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To be higher 60s -- in the higher 60s.

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Christoph Blieffert, Commerzbank AG, Research Division - Equity Analyst of Financials [9]

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Higher 60s, okay. Higher 60s. But if I assume some EUR 20 million per quarter and deduct EUR 20 million from your operating EBITDA to make it comparable to last year, it brings me to 12. And this compares to 25% as of last quarter. Is this calculation correct?

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Steffen Schiefer, AURELIUS Equity Opportunities SE & Co. KGaA - CFO, Member of Management Board & Member of Executive Board [10]

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That's in the right direction, yes. So as you can see, so we had some acquisitions last year in the end of Q4 2019. It were related to a weaker Q3 compared to Q3 2018. So what we see here is if you sell -- have companies like we do and you acquire companies which are in front of a development process, you always have some negative impacts from year-to-year. But for the end of the year, we see us still in the, in our -- always mentioned corridor between EUR 95 million to EUR 120 million for the operating EBITDA.

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Christoph Blieffert, Commerzbank AG, Research Division - Equity Analyst of Financials [11]

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Okay. The last question. On the last call, you mentioned some inventory rundown in your retail business related to Christmas? And for the Christmas season, I mean, what could be a good estimate in terms of cash inflow from inventory reduction in Q4?

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Dirk Markus, AURELIUS Equity Opportunities SE & Co. KGaA - Co-Founder, Founding Partner, Chairman of the Executive Board & Group CEO [12]

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So we see first impact in the Q3. That was what I mentioned in the half year call that we always have a stronger working capital second half year. So it will be a lower double-digit number.

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Operator [13]

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There are no further questions. I hand back to the speakers.

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Steffen Schiefer, AURELIUS Equity Opportunities SE & Co. KGaA - CFO, Member of Management Board & Member of Executive Board [14]

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Yes. Thank you for listening to us for the Q3 earnings call. So thank you all to you, and have a good last working day. And see you all here soon. Bye.

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Operator [15]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.