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Edited Transcript of CAV1V.HE earnings conference call or presentation 24-Jul-19 7:00am GMT

Q2 2019 Caverion Oyj Earnings Call

Helsinki Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Caverion Oyj earnings conference call or presentation Wednesday, July 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ari Lehtoranta

Caverion Oyj - President, CEO & Member of Management Board

* Martti Ala-Härkönen

Caverion Oyj - CFO of Finance, Strategy & IT and Member of Management Board

* Milena Hæggström

Caverion Oyj - Head of IR

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Conference Call Participants

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* Anssi Kiviniemi

SEB, Research Division - Analyst

* Olli Koponen

Inderes Oy - Analyst

* Svante Krokfors

Nordea Markets, Research Division - Analyst

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Presentation

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Milena Hæggström, Caverion Oyj - Head of IR [1]

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Hello, good morning, everyone, and welcome to this News Conference on Caverion's First Half Results. Presenting today, we have our CEO Ari Lehtoranta; and CFO, Martti Ala-Härkönen. Please go ahead.

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [2]

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Good morning on my behalf, distinguished bankers, investors, analysts in this room and then also behind the lines. So we will do as our tradition has been that I will go through the quarter, a little bit about the market and also our performance in that market from different angles. And then Martti will continue with cash flow and financing-related issues. And then also, he will go through how does the market look going forward, and then I will come back and then finish with repeating our guidance and then in this time also, the financial targets -- reminder about the financial targets.

This presentation will take about 40, 50 minutes and then we have possibility for your questions. And as also the tradition has been, I summarize verbally first with few themes the quarter and this time, I selected 4 different themes. One was lower revenue and then also, lower profitability. There are several things impacting the revenue. We believe that this was kind of abnormally big capital in the last year for various reasons. I don't expect similar type of caps going forward.

And then profitability. We have this EUR 16 million negative impact from the old projects and related forecast changes impacting our results.

However, there are lots of positive things underlying. Business continues to develop well. Services business. We love the Services business, it's more predictable, it's profitable. And all my time, it has been continued to grow like it did this quarter as well. And the relative profitability continues to also improve. And that's how we believe that will happen also in the coming quarters for quite long time.

Even in our best performing units, we believe that we have still a lot that we can do to improve the relative profitability, and of course, grow the revenue as well. And maybe, one of the strategic milestones worth mentioning here is the 60% share of the revenue for Services that now we exceeded first time.

Then the star of the quarter, like has been for various quarter now, is the cash flow. And we also love cash flow because cash flow doesn't lie, cash flow tells the -- predicts the healthiness of the business. It also tells about the risk level of the business when the cash flow is positive. And this time, we had a clear drastic improvement in our cash flow. And what I'm particularly happy about is, of course, that we were able to turn around now the German cash flow, and that is very, very good news and indicates the turnaround that we've been waiting for.

Those other themes -- and of course we had during the first half, we have had now made the first steps of the growth. We have been doing the maint acquisition -- Maintpartner acquisition that is still now onto the competition authority's scrutiny. But we have also been investing on the sales and then we have been able to now increase the order backlog very nicely during the quarter. So order intake has been very good and that's one of the main themes of the quarter.

Markets. A few comments about the markets. First of all, geographical comments. So we are well aware of some of the leading indicators turning to more negative, for example, building permits in several of our markets have been now providing worse news than in the past few years. However, in our activity levels, we don't really see this kind of slowing down except maybe in Sweden. So we have stable markets, most of our markets have been stable. And of course, this kind of record-level order intake indicates also that activity level as such have been quite good.

And then also, we have been able to be selective, so we haven't been forced baked orders and then sacrifice the margin of the orders. In Finland and Germany specifically, their activity levels have been still pretty positive.

We have been booking several very nice life cycle projects also during the quarter. What is benefiting us is also this trend that customers are more and more sick and tired of, kind of, cost-only -- low-cost only projects, low-cost only services that tend to lead to some kind of challenges, and we have more and more customers who are -- who want to work with a partnering mode, who want to design the projects and services together. And these kind of customers, we have been able to now get with a decent margins.

And here, you can see the pie of our revenue. So first time ever, we exceeded 60% share of our Services from the total group revenues.

And this is the summary. And I'll use a little bit of a time with this summary, starting from the order backlog. Like I said, we exceeded now EUR 1.7 billion in our order backlog and this is as much as 7% higher than last year. And what is remarkable here now is that first time for at least for few years, we had the project order backlog also increasing. And this is happening in Fit project divisions.

Revenue was lower. It was as much as 9% lower than last year same quarter impacted by many, many things. So selectivity in the project business meant that the -- especially the project revenues went down a lot, as much as 23% in the local currencies. Worth of -- however note that even despite this decline in revenue -- overall revenue, the Services continued to grow its revenue with a reasonably healthy about 4% in local currencies.

Revenue was impacted also by the timing of the Easter. It was impacted by the currency fluctuations negatively, project write-downs had some impact of it and we had some delays in projects in some of the key countries also making the balance between the different quarters a little bit different.

And naturally, we have divestments. Most notably, we had industry piping and tank-related business divestment that we did last year, which had quite a reasonable impact on the revenue on a negative way.

Profitability. Main thing here is this burden from the old projects. We had EUR 16 million net negative impact from what we call major project write-downs, write-ups that harmed our result. We believe that as we are now approaching the end of the Fit phase, so we are not seeing this kind of big hits anymore. We had one project particularly that was -- half of this negative impact was coming from one project only.

The number of projects in this is reasonably limited. You may ask that why, why we have so big number of negative impacts still. But this is what happens typically in these kind of old projects at the end. So you have cost overruns, subcontracting costs tend to increase. You may have some disputes and claims that you settle with the customer with a certain cost, and then that's what we now got. In last years, we have had this negative peak of the project write-downs at the end of the year and then the last quarters. And this time, we believe that now it's time to do the end of this Fit phase.

EBITDA. Adjusted EBITDA was EUR 10 million and this is now worth noted that we are not restating 2018 comparable figures with IFRS 16 standard. EBITDA -- reported EBITDA amounted to about EUR 9 million there is about EUR 40 million improvement to last year. And this EUR 40 million is, of course, the German cartel fine that we paid last year second quarter.

Cash flow was fantastic. It was almost EUR 30 million positive, last year EUR 15 million negative. Naturally, we have this IFRS 16 impact also here. But even despite that, there was a clear, very nice improvement on the operating cash flow. And partially, because of this, our leverage was again well beyond our target levels and in a very low nice level.

Maybe from the other events worth mentioning. This Maintpartner acquisition, so it's still scrutinized by the competition authorities and we hope that in the next months, anyway later this year, we will be able to close this acquisition. Martti will tell more about the financing in his part.

Here, you can see the order backlog development on a quarterly basis. I mentioned this growth from last year. So there is kind of EUR 100 million growth. But worth maybe noticing that from the end of the year, so meaning in 2018, there's an even bigger increase. And then from the last quarter, we have had more than 8% increase in local currencies. And this is very good. I also feel that the quality of the order backlog is constantly improving.

Growth in Services order backlog was higher than in the Project but project now had, like I said, the first positive growth quarter in order backlog for quite some time. And the Projects are good what we have been taking. And here, we have 3 good example -- samples of those. And as my tradition has been, I go through them quite briefly. So the first one is from Austria. And this is our first PPP lifecycle project in Austria. So this is something that we celebrated a lot amongst the group.

These projects provide pretty good riskless project business. So typically well-designed, well-managed projects. And then in -- like in this case, guaranteed good service business for the next 25 years. And like I said that this is the first one for us in Austria. We believe that there will be continuation in the coming years for these kind of projects. This is a typical PPP project. Like in this case, this is a university complex.

Second example here comes from Finland. We are having a project with our beloved partner YIT. Again, a life cycle project this time for 20 years, guaranteed maintenance if the previous one was over EUR 30 million of value, this is now EUR 13 million of value. And there has been several of these that we be winning in the past years in Finland.

The last one is a reminder that even if we have had problems with project business in Germany, the Services business is developing well. So it's growing and also there, the relative profitability is developing well and our brand there is well recognized and is very, very positive. This one particularly is a multipurpose building with offices, retail and hotel in Frankfurt and the value of this one is not disclosed.

This is now the revenue development by quarters. You can maybe look at the first quarter and second quarter in total and compare that to the last year's first and second quarter. And you can see here that the decline is bit less when comparing the first halves.

And then important to look at the division-specific development. So especially, the selectivity that we have been using in these poor-performing project divisions like Germany for example, and Denmark, has meant that there has been a very drastic decline in the revenue. In Germany, 26% and in Denmark 24%.

Maybe worth noting that now we are after having 2, 3 years, and this is now the third year of constant improvement in Sweden. Also here, the revenue development starts to turn more positive. So it is still a decline but it is now single-digit 5% decline in Sweden.

But then especially, if you look at the Austria and Finland, very strong growth. There is some nonorganic growth in Finland, but mainly this is organic growth we are having in these figures. This also means that the relative share of well-performing units in our revenue is constantly going to grow. And of course, order -- also the order development in these well-performing divisions have been very good.

Industry. Now here, we have this negative impact of the -- this big divestment that we did impacting. However also, the Services market outlook in industries actually extremely positive and we see that the development there is good. And then also, the relative performance of the unit has nicely improved.

Norway. Only slightly positive for the quarter, there's a bit of a timing issue. And then other countries, quite flat.

Profitability development. Here, you can see the quarters and once again, I remind that we have this IFRS standard change impacting the comparability here. We have -- we are reporting that we have depreciation for this right-of-use assets something north of EUR 10 million or north of 2% of the revenue as we have predicted.

And now we are, of course, you can calculate that we have been making a bit less than EUR 40 million of adjusted EBITDA in the first half. That means that in our guidance, we need to make more than EUR 80 million for the second half, which indicates again that this project write-down problems are -- need to be in a totally different level than they have been in the previous few years.

Employees. Number of employees have gone now below 15,000. And like I have said now in some of the previous calls that I believe that this headcount figure now starts to increase. First of all, because the increased share of services revenue and Services business we do with our own resources. In Projects, we use quite a lot of subcontracting.

And secondly, we have made our first steps of the growth already, including the smaller acquisition in Finland at the end of last year. And then, of course, Maintpartner, when that is closed, will impact the headcount figure quite drastically.

The restructuring and performance management we have done throughout the organization has, of course, impacted mostly the poor-performing countries and, therefore, the share of Finland in headcount has increased, share of Austria has increased, while Sweden and Germany specifically has gone down.

But still I think that this is a very balanced situation. This reflects the kind of weight and balance of our business and also in terms of revenues and then we have a very nice split between our key markets.

We continue taking good care of our employees' safety. Frequency -- accident frequency rate increased slightly. But still, this is -- in this industry, this is at a very good level. And the employee cost went down close to 6% year-on-year.

Like I said, we set our new Fit for Growth strategy at the end of 2017, and we've been executing it. What it has meant that we have been harmonizing our way of working. Both in Projects and Services, we have been able to improve the profitability. New project business continue to do much, much better. We're not seeing any more similar type issues in the new Projects business. And we've been working on our fixed cost, reducing it nicely, while the revenue has also gone down. And benefits coming from the procurement are clear and visible and also has helped us drastically in the cash flow side.

So now, we are ending the -- nearing -- we are coming near to the end of the Fit phase, and we see that we need to have this project business in much better shape going forward, and we believe that it is, so that enables this growth. And we'd be working now the whole year looking at the different growth opportunities, selecting the ones that are the most suitable for Caverion and this present -- more global megatrends actually support us very nicely on these growth initiatives, both in terms of organic growth and then nonorganic growth.

We have been working on the action plans on these selected areas and we will be coming out now on 5th of November with more precise growth targets. And then we are also going to explain from which areas that growth will come and then what are our specific actions to execute the growth.

So once again, I welcome you all to this session that will be taking place in Helsinki.

And I'll give now floor to Martti to continue with the cash flow and financing.

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Martti Ala-Härkönen, Caverion Oyj - CFO of Finance, Strategy & IT and Member of Management Board [3]

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Thank you, Ari. So if we set aside the fact that finalization of old projects that burden our profitability at the end of the Fit phase, I think there were still a lot of positives also in the second quarter. And above all, we know that we, of course, operate a cash flow business and strong cash conversion, that is our primary financial target. And we did continue to generate a strong cash flow in the second quarter.

So turning more precisely to cash flow. Our operating cash flow before financial and tax items amounted to EUR 59.2 million versus EUR 4.9 million a year ago. In the second quarter, the improvement actually more notable, operating cash flow at EUR 29.1 million versus a negative EUR 15 million a year ago.

In the second quarter, the improvement was -- or here, it should be taken into account that the comparative figures for 2018 have not been restated according to IFRS 16. But even when accounting for that change, taking that into account, the comparatable -- the comparable operating cash flow improved by more than EUR 30 million in the second quarter.

Our free cash flow improved to EUR 52.1 million versus a negative EUR 5.1 million a year ago in the first half year, that is also a substantial improvement.

Our capital expenditure was EUR 8.3 million, slightly higher than a year ago. IT investments continued to decrease and we're EUR 4.6 million, there is a decrease of EUR 1.1 million. Whereas, the other investments, including acquisitions, were somewhat higher at EUR 3.7 million. That came actually the increase mainly from the acquisitions.

I'm also very pleased that we have been continuing to release cash from working capital, that has been one of our focus areas already for several quarters. So now at the end of June, our working capital level was EUR 80.8 million negative at the end of June versus EUR 57.2 million negative a year ago, and we can see in the graph that the overall positive trend we have seen in the past several quarters continued.

I also want to point out that the year-on-year improvement was actually as much as EUR 64.4 million when excluding the impact of the one-off German cartel fine accrual, which we made in the second quarter of last year. So we made the accrual in the second quarter of last year and then it was paid in the next quarter so that had a one-off -- just the one-quarter impact on our working capital debt level.

And this time, the improvement, if we look into the components of the working capital, on the receivables side, the amount of trade and POC receivables, that decreased by about EUR 27 million, amounted to about EUR 502 million and other current receivables decreased by about EUR 19 million, amounting to about EUR 25 million.

On the liabilities side, the trade and POC payables decreased by about EUR 13 million, amounting to EUR 195 million, and then advances received also increased. It's a good thing that we have been able to increase advances to EUR 197 million versus EUR 171 million a year ago, about EUR 26 million increase.

In this graph, we can see then working capital development by division. And I think here, it's foremost important to note the improvement we have made in Germany when we are here also looking at when excluding the impact of the one-off cartel fine accrual made in the second quarter of last year.

So excluding this impact, we can see that the level of working capital in Germany has decreased from about the level of about EUR 60 million to current about EUR 29 million. And also, in our second quarter report, we note specifically that our cash flow in Germany has turned to positive.

In the last few quarters, I have noted that we have efforts ongoing to reduce the level, and I'm quite pleased that we can see here some of the effects we've been running the performance management program throughout the branches, branch-specific programs related working capital as well as cash flow, of course, working with the old projects and their finalization.

In addition, we can also see that there is good improvement on the working capital level, particularly in Finland and industrial solution. Industrial solution as well as in some other divisions. So overall, I'm quite pleased with this development, overall.

In this slide, we can see the credit ratios, how they are affecting or how the credit ratio have been affected by the IFRS 16 standard adoption and also the fact that we redeemed our hybrid notes totaling EUR 34 million in the early part of this year in the first quarter in March. So that can be seen in the graphs.

Also we note that the net debt excluding the lease liabilities for the group totaled only EUR 24.7 million at the end of June.

The impact from the IFRS 16 is of course quite notable so that's the leases which were previously off balance sheet, were brought into the balance sheet. Those totaled EUR 134.3 million at the end of June so net debt, including the IFRS 16 adoption, was EUR 158.9 million at the end of June. But it's of good to note that we are currently in a very liquid position so cash and cash equivalents had totaled as much as EUR 104 million at the end of June.

And on the right-hand side in this picture, we can see this -- it's describing the Group's debt maturity structure at the end of June, and we can see that we have in a material sense, prolonged the debt maturities in the early part of this year to the refinancing first. First of all, of our bank loans in the first quarter and then later, to the issuance of a EUR 75 million secured -- unsecured senior 4-year bond, which was issued in March of this year.

This slide, on the other hand, shows the overall development of our financial position. We can see overall, first of all, that as far as I think that the Group's financial position has clearly improved from what it was back in 2016 or '17 or still in the early part of 2018. And this is most notable in the graph describing our financial covenant net debt-to-EBITDA which was only 0.8x now at the end of June according to the confirmed calculation principles we have with the lending parties. And I think this is a good level taking into account now also the partial redemption of our hybrid notes, which took part in March earlier this year.

It's maybe good to emphasize that the confirmed calculation principles, they exclude the effects of the IFRS 16 standard and contain also certain other adjustments such as excluding the German anti-trust fine and related legal and advisory fees.

At this slide also in the lower picture describes our strong liquidity position. I already mentioned the EUR 104 million of cash. But in addition to what -- to that, we have also other facilities available. We had an undrawn revolving credit facility totaling EUR 100 million and undrawn overdraft facilities totaling EUR 19 million undrawn at the end of June.

So overall, we think that the low leverage level, together with a strong liquidity base, that those 2 combined enable for us a smooth entry into the growth phase in our strategy.

I will next still make a very brief look into the market sentiment overall. In this slide, as we have described also before, we can see updated data on the economic sentiment indicator and the construction confidence indicator as issued by the European Commission during this month. We do constantly follow both of these indicators as we recall them being forward-looking indicators.

And regarding, first of all, the economic sentiment indicator. We can see that there is some kind of an effect clearly visible from the economic uncertainties that we have seen in the past few months and quarters. But it's still worth noting that most Caverion countries are still above the long-term average level.

And regarding the construction confidence indicator, on the other hand, the trend lines of all main Caverion countries are above the long-term average level and with the exception of Denmark, still rather clearly above.

So overall, these trendlines have actually not much changed since the first quarter and following this data and our own observations and other recent market estimates, like Ari also said earlier, our main comment is that the market environment for us is prevailing and remaining as stable in our key operating markets.

At the same time, the underlying services demand is expected to remain strong. On the right-hand side, we repeat data regarding the European facility service market growth outlook. And from the picture, we can see that the estimates are for an annual growth of between 3.7% to 3.8%. Over a long period of time actually, until 2025, that's as far as I know how far you can find estimates existing at this moment.

So in this regard actually, we believe that Caverion is well-positioned to reap the benefits. And I also want to emphasize over the past few months, we have been working with several growth streams in preparation of the growth phase of our strategy. And like Ari already told, we will tell more about that in November at our Capital Markets Day.

I will for my part close here, and Ari will next continue taking a look at our guidance.

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [4]

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Thanks, Martti. Before jumping to the guidance, reminding about our financial targets. I'm not going to go through the strategy. We talked about it last time. This is an update on where we are regarding the financial targets. So in cash conversion, where our target is to exceed 100% EBITDA in the cash conversion, we can see that we are progressing nicely towards this target. The operating cash flow before financial and tax items was close to EUR 60 million in the first half.

In profitability, we are targeting to exceed 8% adjusted EBITDA. In the first half, we were close to 4% and now are estimating clearly improvement -- clearly improving second half. In leverage, we have been now already for a few quarters already meeting our target.

On the growth, we have had no specific overall growth target. We have had the growth target for Services that we will be growing faster than the market and then, that Services will, in the long term, generate more than 2/3 of our group revenue. And there, the progress have been actually very good. The services have been growing nicely. And then especially, this services share has actually increased even more than we predicted when we started the strategy round.

And then repeating the guidance, which is unchanged. So on revenue, we are saying that the Services revenue will continue to grow and its share of the group revenue will grow. And on the adjusted EBITDA, we are saying that we will be exceeding EUR 120 million, which means that in the second half, we need to make a bit north of EUR 80 million.

And this completes our presentation part. And now we are ready for your questions here in the audience and then behind the telephone lines.

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Milena Hæggström, Caverion Oyj - Head of IR [5]

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So let's open up for the questions here. We have a microphone here in the back. So please use it.

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Questions and Answers

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Anssi Kiviniemi, SEB, Research Division - Analyst [1]

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Anssi Kiviniemi from SEB. 3 questions from my side. First of all, starting with the EUR 16 million project cost overruns. How much of that is related to closing or finalizing some of the problem projects? And how much is related due to the -- or in this situation that Q2 is the last quarter of your Fit phase and you are probably in situation of being more conservative in some margin assumptions going ahead, i.e., you being more cautious now in order to not, let's say, book exceptional items going forward?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [2]

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Do you want that I answer that first one now?

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Anssi Kiviniemi, SEB, Research Division - Analyst [3]

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Yes, yes.

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [4]

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Okay. So I don't have any precise percentage figures. This one project that was half of that negative impact that will be completed now in the third quarter and at the very beginning of the fourth quarter. So that was quite a big chunk of this. It is true that this EUR 16 million impact includes project write-downs for already completed -- for continuing project cost overruns for already completed projects and then some risk provisions for projects going forward.

We were able to negotiate certain settlement agreements related to this one particular project and the one identified risk project, which impact we are excluding when we report the adjusted EBITDA. And that settlement -- those settlement agreements meant that we were able to increase the scope and, therefore, the revenue and, therefore, the kind of share of old projects did not decrease closer to the 0 level in the quarter.

We, however, see that these 2 particular projects are the major chunk of this diminishing old project order backlog already in the third quarter. And then this one project, identified risk project, will continue to next year.

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Anssi Kiviniemi, SEB, Research Division - Analyst [5]

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Still on the EUR 16 million. If we exclude that, the EBITDA margin was at 5.1%. Is that a good reflection of the underlying result development and the fate of the company or is there something else that we should take into account?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [6]

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Yes. The revenue -- this quarter was like we discussed, that it was a bit specific. For example, the Easter impact is surprisingly big for companies like us with the services -- ongoing services and project business as well. So that had a bit of a negative impact on this one. So I think that we should achieve even better underlying profitability going forward.

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Anssi Kiviniemi, SEB, Research Division - Analyst [7]

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Okay. Then on guidance. It demands basically quite a historical jump in earnings and historical earnings in the second half of the year. So what gives you the confidence because you probably have some kind of buffer between what do you think where the result is going to end and where kind of the guidance is. What are the key drivers and what gives you the kind of confidence to keep the guidance intact despite the H2 -- H1 has been probably not as good as you have hoped for?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [8]

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Okay. You are right. We need to have a good third quarter, fourth quarter. They are typically, also historically, they have been always our best quarters in a year. This requires that the project business, this kind of big hits, millions of euros hits from single projects, they are all worth. And that's also what I believe that this kind of multimillion negative -- multimillion-euro negative impacts from single projects to our adjusted EBITDA are over.

So we are having -- when we are looking, of course, we are looking at this risk projects on a very, very thorough phase. We see that the changes now are in the levels of tens and hundreds of thousands rather than millions. So that's good news and gives us confidence for the second half.

Services is growing, and services share of the business is growing. So that's more predictable and that's more profitable as well. And also, this fact that we have now more and more -- relatively more and more revenue coming from this Fit divisions. Industry services looks very good for the second half. Finland, Austria look very good for the second half. Also, Norway is going to do much better in the second half, so that gives us confidence.

We have buffer naturally because of this one particular hit. The buffer is not as big as we were hoping but we still have a buffer there between the guidance and our forecast.

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Olli Koponen, Inderes Oy - Analyst [9]

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Olli from Inderes. I have few questions left. Firstly, about the markets. You said that Swedish market has started to show some weakness in Projects. Is this also visible on Services? And how is the overall -- how weak is the Swedish market right now?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [10]

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Yes. It's not so drastic. And then actually, I have been happy for our old orders in Sweden, and I believe that we are not going to see negative trend in the our orders even going forward that kind of prospects, they look good. Maybe we are also benefiting from the fact that the market has been so hot that some of our competitors clearly have their order books full already. And then even with the lower market, we should be able to increase our market share.

In Services, it hasn't impacted the services activity level or market any -- this ongoing reduction in, for example, in the number of permits, building permits.

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Olli Koponen, Inderes Oy - Analyst [11]

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And about those projects risk going forward, how do you -- how long do you think the old weak projects in your project order backlog are going to take? Now it's in 7%. And when do you expect it to hit 0%?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [12]

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Yes. About half and soon more than half of this backlog -- diminishing backlog is on these 2 projects only. And that's why we are not going to most probably any more talk about this old project backlog share from this quarter onwards. And like I mentioned that this one particular project will be completing now mainly in the third quarter, maybe slightly in the beginning of fourth quarter. So then we have basically one project anymore going to the next year.

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Olli Koponen, Inderes Oy - Analyst [13]

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Okay. And how about this Germany risk project? When do you expect it to end? You said...

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [14]

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That will end in next year, most probably second half. At the end of first half or second half next year.

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Olli Koponen, Inderes Oy - Analyst [15]

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Okay. And one question about the reporting. In Q2, you said the IFRS effect on EBITDA margin and what was the effect now in Q2? Can you say?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [16]

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The impact of the...

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Olli Koponen, Inderes Oy - Analyst [17]

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EBITDA margin with the IFRS 16 effect?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [18]

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We confirmed that it was again the same what we had been predicting. So it was about 2%, slightly over 2%.

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Svante Krokfors, Nordea Markets, Research Division - Analyst [19]

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Svante Krokfors, Nordea. Two questions. The first one is relating to the old projects, and correct me if I'm wrong, but I think the wording here that you have in your comment is that you believe that the magnitude of project write-downs and cost overruns will decrease going forward. Should this be interpreted positively or negatively as I guess some investors have believed that you could start to forget about -- after H1 about the old projects and cost overruns?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [20]

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I'm not sure if I interpret your question correctly but naturally, it should be taken positively. So we see clear improvement now for the project profitability going forward.

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Svante Krokfors, Nordea Markets, Research Division - Analyst [21]

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Then is there any change in Fit for Growth development regarding the divisions? Is there some setbacks or some divisions going ahead of schedule? Any changes in the last 3 to 6 months?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [22]

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We turned around Norway 2017. Last year, we turned around the industry solutions, and those both will be delivering very good second half. Sweden has been now improving their performance 3 years in a row, and we see that next year will be again a better year. At the same time, the best performing units, Austria and Finland, have been able to improve further their own performance.

So no setback there and we have started to make reasonably big moves like this Maintpartner acquisition is for us. We believe that there will be, kind of, new countries also where we are doing nonorganic growth in the next quarters.

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Svante Krokfors, Nordea Markets, Research Division - Analyst [23]

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Where do you see the best acquisition opportunities divisionally? And is Sweden ready for bolt-on acquisitions next year?

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [24]

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Yes. These bolt-on acquisitions, they are reasonably easy. If the size is kind of small to medium-size, they are reasonably easy to integrate. And then we see that the Fit divisions are allowed to do those, and like I said, that we've been doing them mainly now in Finland and Austria and there will be new countries, most likely, where we will see some impact. And I'm also predicting that Sweden will be also amongst these divisions, whether it's in the next few quarters or at least next year, then that remains to be seen.

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Unidentified Analyst [25]

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[Paavo], Nordea. I have only one question about working capital. It has improved and it's somewhere like 4% of sales negative. So what do you see like as a reasonable level for working capital? Can it improve further in relative to sales?

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Martti Ala-Härkönen, Caverion Oyj - CFO of Finance, Strategy & IT and Member of Management Board [26]

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Yes. This is already on a relatively good level. If we -- what has been happening also that the Service business increases, there is not so easy to operate on because we have a lot of small orders that we have to -- we're typically making the work first and then doing the invoicing.

But if we look by division, of course, I mentioned the good improvement in Germany at EUR 29 million, there is still room to improve there. And in between, we have Finland and Norway and a very good level then also now industry -- Industrial Solutions improved a lot. But then we have a number of divisions where we have -- so I would say that this is already a good level. There is some improvement potential also going forward but the main improvement we have been seeing, I think, throughout the previous quarters.

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Milena Hæggström, Caverion Oyj - Head of IR [27]

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So it seems that we no longer have any questions here in the audience. So we can now move over to the conference call. So please, open up the lines.

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Operator [28]

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(Operator Instructions) It appears there are no further questions at this time. I'd like to turn the conference back to the speakers for any additional or closing remarks.

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [29]

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Okay. And then I'll take over now. So we have received also some questions through e-mails. Few from Ari Järvinen from Danske Bank. I think, Ari, I have answered 2 of your questions. But one of the questions you have here which I would like to address now.

So you are asking that the order backlog grew by 7% year-on-year. What drove such strong growth? And the fact is that we were able to get several life cycle projects in different countries during the quarter, and that is, of course, excellent news. We get good project business for short term and then excellent service business for the long term.

Also, the Fit divisions -- all the Fit divisions had good development, both on their services and project orders. And then, we have time -- timing also was on our side in this quarter that we had some German projects, kind of, midsized from the historical perspective from Germany that we were able to book during the quarter.

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Martti Ala-Härkönen, Caverion Oyj - CFO of Finance, Strategy & IT and Member of Management Board [30]

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Maybe I could add there that we are saying that both the Services business and Project business increased the order backlog. Actually, the Service business was up more but if it -- it is of note that also the Project business order backlog was somewhat up. So we have seen -- it was a steep decline in the -- as we have been doing the turnaround in the project business revenue. But now there was little bit of upside also in the order backlog for Projects.

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Ari Lehtoranta, Caverion Oyj - President, CEO & Member of Management Board [31]

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Okay. And if there are no further question, I thank you for your activity and see you in 3 months again.

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Milena Hæggström, Caverion Oyj - Head of IR [32]

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Thank you.

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Martti Ala-Härkönen, Caverion Oyj - CFO of Finance, Strategy & IT and Member of Management Board [33]

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Thank you.