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Edited Transcript of BALCO.ST earnings conference call or presentation 27-Aug-19 7:00am GMT

Q2 2019 Balco Group AB Earnings Call

Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Balco Group AB earnings conference call or presentation Tuesday, August 27, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth Lundahl

Balco Group AB - President & CEO

* Michael Grindborn

Balco Group AB - CFO & Head of IR

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Conference Call Participants

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* Julius Rapeli

SEB, Research Division - Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Balco Q2 report 2019.

(Operator Instructions) Today, I am pleased to present Kenneth Toll -- Kenneth Lundahl and -- CEO; and CFO Michael Grindborn.

Speakers, please begin.

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Kenneth Lundahl, Balco Group AB - President & CEO [2]

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Thank you. Welcome to the Q2 reporting of Balco.

We'll start with Page 2, a snapshot of Balco.

We are leading provider of complete glazed balcony system in the Nordics. We help customers which have problem with existing balconies. And our solution is the Balco method, where we cut away the old balcony, put up a new, bigger glazed balcony with a lot of positive features. We are focused in the Renovation segment. We have a unique selling process where we help the customer through the whole process from choosing the product, voting, building permission and, of course, completion of the product -- project. Our key markets are the Nordic countries.

Page 3, Q2, breakthrough regarding financing in our largest market. I will come back to this because this is really the most important thing that has happened for Balco this quarter.

Our order intake is plus 46% in the quarter to SEK 436 million, of which renovations accounted for 91%. Order intake in Q2 was 34% higher than our revenue, and we expect a substantial order intake increase also in the third quarter. Our revenue growth, plus 19% in the quarter to SEK 322 million (sic) [SEK 325 million]. Acquired growth for TBO-Haglinds, 22%. Our organic growth was minus 3% in the quarter, and we expect organic growth to be above 10% in the second half of this year.

Our operating profit is plus 40% in the quarter to SEK 44 million. Operating profit margin now is 13.6% in this quarter compared to 11.5% last year, and this is the first quarter that we exceed all our profitability goals.

If we look at the financing. We have now prolonged the banking agreement until September 2022, and we have now an acquisition credit restored to SEK 100 million that we had before. And we have now the last half year worked with focusing the financing.

If we look at the costs for our customers, let's call it a monthly cost, in Sweden, we never had an amortization for 50 years. Now we have succeeded with 7 years (sic) [70 years] with a leading bank. And this is really a breakthrough. It decreases the costs for our customer, the monthly costs, with more than 20%. And this changes the way of how we select projects and how easy it will also be to succeed with a project. So this is really something that is good for us. And our focus going forward will be, of course, to do this also in other countries. I will come back also to why we have succeeded with this and yes -- later in this presentation.

Michael?

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Michael Grindborn, Balco Group AB - CFO & Head of IR [3]

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Yes. Some financial highlights for the second quarter.

As mentioned, we improved our operating margin to 13.6%, and it is the first quarter that we exceed our profitability target of 13%. Our net sales increased by 19% to SEK 325 million compared to SEK 274 million last year. The acquired growth from TBO-Haglinds was 22%, while organic growth was negative by 3.4%. The currency effect was positive by roughly 1%. The Renovation segment accounted for 88% of our sales, while the New Build was 12%.

If we look at the order intake, we had a good increase of 46%, up to SEK 436 million. And here the organic growth is 39%. So we had very good organic growth in order intake. The Renovation segment increased by 47% and accounted for 91% of the total order intake in the quarter, and we expect a substantial order intake increase in the third quarter compared to last year. Our order backlog increased another SEK 112 million in the second quarter, up to SEK 1.64 billion compared to SEK 1.3 billion last year. And it's a new all-time high for our order backlog.

Our operating profit increased by 40%, up to SEK 44.3 million compared to SEK 31.5 million last year. And the operating margin, up to 13.6% compared to 11.5% last year, whilst the cash flow improved to SEK 41.6 million compared to SEK 13.3 million last year, and it's due to better EBITDA and less increase of our working capital when we had last year.

So we'll continue to Page 5. The summary of the second quarter: good growth in top line, earnings, order intake and backlog. Order intake, plus 46%; order backlog, up 25%; revenue, up 19%; and operating profit, up 40%; and then operating margin, up 13.6% in the quarter.

Let's go forward to Page 6 and look at our business segments.

The Renovation segment had a strong order intake and a solid profitability in the quarter. The order intake increased by 47%, up to SEK 398 million, and of this, 40% was in organic increase; and it was 91% of the total order intake in the quarter. The order backlog for the Renovation segment increased up to SEK 1.5 billion, and it's an increase of 32%, and it's now 91% of our total order backlog.

Revenue increased by 19%, up to SEK 285 million, and it was 88% of the total sales in the second quarter. Our operating profit for the Renovation segment increased by 34%, up to SEK 42 million, with an operating margin of 14.9%, and it was 13.1% last year. So good increase also on the operating margin.

If we go forward to Page 7, we have a look at the New Build segment in the second quarter. Also, the good order intake increased by 13 -- 30% with just SEK 39 million. We have this new strategy that we are more selective with the New Build segment. That's the reason behind this, but revenue increased by 21%, up to SEK 40 million. And we are especially glad about the profit development in the New Build segment that increased to SEK 4 million, given an operating margin of 8.8%. Last year, the profit was just 1.2%, so we see that our new strategy really help delivering in the New Build segment. But the order backlog in the New Build segment has decreased 19%, down to SEK 142 million, and it's just 9% of the total order backlog.

So if we continue to Page 8 and have a look at the half year period and some financial headlines, highlights for the first 6 months. We have had good growth in sales and order intake and also improved profitability in the first 6 months of the year. Net sales have increased by 15%, up to SEK 595 million. Of which, this acquired growth is 20%. Currency is roughly 1%, while the organic growth has been negative by a little bit more than 5%. Renovation segment has accounted for 85% of total sales and New Build segment 15%.

The order intake has increased by 40%, up to close to SEK 800 million. And here the Renovation segment has increased by 37% and accounted for 91% of the total order intake in the period. And of the order intake, 17% is organic growth.

If we look at the operating profit, it's been increasing by 33%, up to SEK 71.3 million compared to SEK 53.5 million last year. And we have improved our operating margin up to 12% compared to 10.4% last year. Also, the cash flow has improved by SEK 44 million up to SEK 34 million, and it's also due to better EBITDA and less increase of working capital than we had last year.

So in summary, on Page 9, the first 6 months: an increase by order intake, but it exceeded the increase in revenue by 34%. And we have also improved our profitability. So an order intake increase of 40%; revenue increase of 15%; and operating profit increase of 33%, up to SEK 71 million or 12% operating margin compared to 10.4% last year.

We will go forward to Page 10. We'll have a look at the 2 business segment, the first 6 months. The Renovation segment have had a solid, profitable growth. The revenue has increased by 11%, up to SEK 510 million. And the operating profit has improved by 21%, up to SEK 67 million. And the operating profit margin for the Renovation segment has improved to 13.1% compared to 12% last year.

And if we have a look at the New Build segment. Also good revenue increase by 49%, up to SEK 85 million. And also especially good to see good, stable profits that have increased to SEK 7 million or a profit margin of 8.1% compared to 1.8% last year. So really good development of the profit margin in the New Build segment.

So if we continue to Page 11 and have a look at the balance sheet. We still have a strong financial position with a continuously strong balance sheet. Our equity-to-asset ratio is 42%, a little bit down compared to last year that was 45%. And it's driven by an increase of the balance sheet due to the acquisition of TBO-Haglinds and the implementation of IFRS 16. And also we have doubled our dividend payment this year compared to last year.

The net debt to EBITDA is also at a good level, 1.5x compared to 1.1x last year. And the increase is due to increased debt from the acquisition of TBO-Haglinds and also some effect of implementation of IFRS 16. If we look at the net debt to EBITDA excluding the leasing debt, it's just 1.1x.

Our profit after tax has also increased to 53.6% -- SEK 53.6 million compared to SEK 38.7 million last year, and it's an improvement of 38%. And it corresponds to an earning per share of SEK 2.68 compared to SEK 1.92 last year. And we're prepared for further acquisitions. We have our acquisition -- a good acquisition headroom. We prolonged our banking agreement with Danske Bank to September 2022, and the acquisition credit has been restored to SEK 100 million. We have also strengthened our organization for acquisitions during this year.

And if we look at Page 12 and have a look at our financial targets. We have achieved 3 of 4 targets during the first 12 months, and we're getting close also to the fourth target. We have a growth target of 10% per year, and here we have the last 12 months received -- had 13% increase. Our profitability target is a profit EBIT level of 13%, and our 12 months adjusted EBIT margin has been 12.1%. And as we mentioned before, in the second quarter, we exceeded for the first time our profitability target and had 13.6% profit in the second quarter.

The capital structure. We should have net debt-to-EBITDA not exceeding 2.5x, and here we are at 1.5x today. And we should distribute half of our profit after tax. And in 2018, our dividend ratio was 54%.

So we continue at Page 13, and I give Kenneth the pleasure to speak again.

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Kenneth Lundahl, Balco Group AB - President & CEO [4]

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Excellent, Michael. Well done. Our sustainability initiatives. We know that our lifetime is more than 90 years of our products. We know that we are climate-positive. We know that our Balco method solution creates an energy saving between 10% and 30%, depending on the product and conditions. And we also know that our Balco method reduces the maintenance need of the building regarding windows, doors and the façade.

Page 14. The new conditions create new opportunities, and there are actually 2 things that works together. One is the financing, and one is sustainability. The knowledge of that the product life span is over 90 years; the knowledge of higher energy savings is 10% to 30%; the product is fully recyclable; and we know that we give the climate -- positive climate impact. An average standard Balco solution with the Balco method gives a positive 0 emission of -- corresponding to 10 growing trees. This is what we have found out in the life cycle analysis. And the work we have done here will also change our product development going forward because we can actually improve this even more. We have also made comparison against concrete renovations during the same life cycle. And then we can see that they actually cut down 3 trees -- 7 trees with the corresponding size of the balconies.

So with the Balco method, you grow 10 trees, concrete renovation, you cut down 7 trees. But this knowledge to get lifetime energy saving, positive climate impact, 0 emission positive during the lifetime, this is one of the reasons why we have been able to educate the bank to give a financing amortization that is longer. We had 50 years before in Sweden. Now with one bank, we become 70 years. And this will give us a total unique position to help the customer with actual need to have. This decreases the monthly cost for the customer with more than 20%. It will -- this will change the way we can develop the organic growth further. And this -- now we did this with Sweden first. We shall, of course, aspire to, one, continue this work in other countries. In the other countries outside Sweden, the amortization time is between 15 and 40 years, and this we shall, of course, improve.

When we are working with projects, first of all, we often start to sort out projects we don't want to work with. After that, when we focus it, of course, the customer need a solution. I will say that average between 40% to 50% of the products will actually happen. The major reason to a project not happening, I will say 75%, that is not due to the cost of our product, that is due to the too-short amortization. If you choose an amortization of 15, 20, 25, then the monthly cost will be up to, say, SEK 1,000 a month, when the real cost is never more than SEK 300 a month for our products. So in these cases, it happens sometimes that they will be voting no, but when we look at these products that they voted no and go back a couple of years, they are still not done. The customer have no solution. So with this financing solution, we will be able to help the customer even better in the future.

That was the end of this reporting. Questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Kenneth Toll of Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [2]

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So I think that this acquisition, TBO-Haglinds, that -- in terms of sales growth, it seems to do very good. I think that sales were higher than my estimates both for the first and the second quarter. So can you talk a little bit how order intake and profitability is developing at TBO, please?

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Kenneth Lundahl, Balco Group AB - President & CEO [3]

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If you talk -- when you talk about sales, if you talk about order intake then, the order intake overall is very good. And it's also good in TBO. And we have also -- they have more confidence now with their resources and they have hired 2 new salesperson. So they have a good order take. The order take is close to the level in the rest of the Balco.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [4]

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And they also -- they have a good sales trend as well. I mean they managed to execute contracts to really sort of work off the order book as well.

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Kenneth Lundahl, Balco Group AB - President & CEO [5]

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Yes. It is like this. If you compare from Q3 last year, TBO had a very strong order book. Kontech had a very strong order book, Balco a little bit less. Now all 3 companies has built them even further. And they are coping to handle this turnover-wise, also with support of Balco in the operation and in the production. I think they would have a problem otherwise to execute the order stock without coming into Balco.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [6]

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And having heard that, I guess that the profitability of TBO is also good?

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Kenneth Lundahl, Balco Group AB - President & CEO [7]

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Yes. They work -- yes, yes, yes, better than -- yes, it follows the plan better than expected. And they are also totally in the Renovation segment. And in Renovation segment, you see that our EBIT margin is close to 15%.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [8]

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That's very good. So -- and also you talk in your presentation that you have now finances in place and also have strengthened the organization to do acquisitions. So would you start looking for acquisitions already now? Just...

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Kenneth Lundahl, Balco Group AB - President & CEO [9]

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Our #1 priority is the financing to help the customer. That will change the business for Balco. I mean if we can succeed with also improvement in financing the rest of the company -- countries, this will be even more fun. But of course, regarding acquisition, there are acquisitions there and our absolute interest in acquisitions. And we have an organization for it, and we also have possibility to do that.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [10]

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Then maybe lastly. You talk about -- when you talk about the outlook, you talk about that order intake is probably including Q3. It was weaker in Q3 last year, but you have a lot of quotations now. But you also talk about organic growth around the 10% level for the second half. Now order intake was good in Q1, Q2; looks to be good also in Q3. So are you -- do you have the organization to round all those projects to have a really good organic growth into next year? Or what is...

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Kenneth Lundahl, Balco Group AB - President & CEO [11]

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Kenneth Toll, the answer to that is, oh, yes. If we look at the operation organization and production organization: the first half year in Balco AB, they have had too little to do. So that now when the order stock is a lot bigger, you get building permissions, so the -- then the turnover will come in Balco AB. And they will get more efficient. We have a capacity, without big investments, to EUR 160 million, but of course, in our plans we will in 2021 build a new factory. We plan to build new factory in Poland. But the next calendar year 2020, we will not have any capacity issues.

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Operator [12]

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And our next question comes from the line of Julius Rapeli of SEB.

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Julius Rapeli, SEB, Research Division - Analyst [13]

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Congrats on the great report. A couple of follow-up questions regarding the TBO, for instance. I mean you had a really strong H1 for TBO. Could you a bit elaborate on the outlook for H2? Can you keep up with a similar pace? And then if I can continue, I mean, have you -- relating this, have you raised your outlook for TBO for H2? As you have now slightly lowered your outlook for the organic growth for the entire group based on the report, if I had understood it correctly.

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Kenneth Lundahl, Balco Group AB - President & CEO [14]

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If I take TBO, they are running smoothly, increasing -- they're selling more than they are having revenue offset, they are building order stock, they are building organization. So there you will see good and nice trend going forward. But the change in this organic growth full year or half year, that's not with TBO. TBO is increasing and Kontech is really increasing a lot. It's more that it has taken longer time to get up the turnover in Balco AB. We thought it would come earlier. It's one of the projects that is over SEK 100 million in order stock. We thought that would be -- we will get the building permission there already in Q1. Now we have got it. So that has really, I will say, changed; and the turnover is coming. Third -- so actually it's not TBO that -- any changes or Kontech. They're running it absolutely according to plan. The only change is that turnover came -- is coming later in Balco AB for 2019.

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Julius Rapeli, SEB, Research Division - Analyst [15]

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Okay. If I may follow up a bit, is there any like seasonality in the TBO sales? I mean the Q2 was not really strong. So do you expect the H2 to be as strong as H1? Or is there any seasonal effect usually?

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Kenneth Lundahl, Balco Group AB - President & CEO [16]

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No, not in the turnover. It can be in the order take, but the order intake also looks promising. It's only in the Renovation segment.

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Operator [17]

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(Operator Instructions) And we have one further question coming through that comes from the line of [John Hilter] of (inaudible).

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Unidentified Analyst, [18]

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Can you hear me?

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Kenneth Lundahl, Balco Group AB - President & CEO [19]

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Yes, we hear you.

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Unidentified Analyst, [20]

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Great. Just a question on the order intake. Was there any big orders having a big impact on the organic order intake going forward? Was it spread out between many different projects?

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Kenneth Lundahl, Balco Group AB - President & CEO [21]

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There were no big ones. We are still waiting for the big ones.

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Operator [22]

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And we have a follow-up question from Kenneth Toll of Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [23]

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Yes. On building permits, so your sales numbers are very dependent on building permits. And I remember, some time ago, you were complaining that it took quite a long time for -- to get those building permits through. Have you seen any change there? Or is it a little bit easier in Sweden or Denmark now?

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Kenneth Lundahl, Balco Group AB - President & CEO [24]

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In Denmark, we are totally through with the building permission for city balconies. So everything is in our hand to deliver the turnover. I can't say that I see a major change yet in Sweden, but when I talk Sweden, I only talk about Stockholm because it's actually there you have a long lead time. In the other areas, you don't have it, so -- but I will not say that I see big change due to -- the new building area going down should actually affect us positive in the lead time for building permissions, but you should also know that there is -- it's building permission when there is a product of EUR 10 million that's gets approved. That really gives a big -- something to work with.

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Operator [25]

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(Operator Instructions) Okay. There seem to be no further questions coming through at this time, so I'll hand back to our speakers for the closing comments.

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Kenneth Lundahl, Balco Group AB - President & CEO [26]

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Okay. Thank you from us, and we all you -- wish you an excellent day.

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Michael Grindborn, Balco Group AB - CFO & Head of IR [27]

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Yes, thank you.

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Kenneth Lundahl, Balco Group AB - President & CEO [28]

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Thank you.