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Edited Transcript of CCC.ST earnings conference call or presentation 8-Nov-19 9:00am GMT

Full Year 2019 Cavotec SA Earnings Call

LUGANO Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Cavotec SA earnings conference call or presentation Friday, November 8, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn Withers

Cavotec SA - Group Senior VP & CFO

* Mikael Norin

Cavotec SA - Group CEO

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Conference Call Participants

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* Karl Bokvist

ABG Sundal Collier Introduce - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Cavotec Q3 Report 2019 Call. (Operator Instructions)

Today, I'm pleased to present CEO, Mikael Norin; and CFO, Glenn Withers. Please go ahead with your meeting.

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Mikael Norin, Cavotec SA - Group CEO [2]

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Good morning, everyone, and welcome to this audiocast. My name is Mikael Norin. I'm the CEO of Cavotec. And with me today, as usual, I have our CFO, Glenn Withers. And we will today present Cavotec's Q3 2019 report.

Let me off the back say that I'm pleased with our performance during the third quarter. We recorded growing order intake, the profitability improved further and the cash generation was strong.

And I'm especially pleased that we continued to, as we've done throughout this year, to track perfectly to the plan that we set for 2019, which was to focus on profitability by building on achievements from the transformation that we've done, while holding the line on revenue and targeting quality in our orders.

The transformation of Cavotec is now winding down. We will, for the remainder of the year, continue to focus on securing long-lasting embedded profitability, while we keep investing in operational and commercial improvements.

So that way, we can finish the year with a strong position from which to commence the next phase of our journey, which is profitable growth with the emphasis on profitable from 2020 and onwards.

Now if we look at the third quarter in more detail, we saw the order intake increased 36% versus last year, with the order book finishing at about EUR 110 million. And this is almost 10% higher than where we started the year. This strong development is mainly explained by high activity in the Ports & Maritime market, especially in the U.S. and Nordics, leading to significantly increased order intake with automated mooring and e-ferry solutions leading the way. In addition, we also saw continued strong performance within our service offerings in relation to our Ports & Maritime customers. And that strong performance within Ports & Maritime compensated for the overall lower activity within the Airports segment. Several large projects have been delayed, and we also saw a mix towards small orders. The result was lower order intake compared to the same period last year. However, there continues to be a large potential for our Airports offering as a result of significant plans for airport terminal expansions around the world, not least in the U.S. and Asia and the focus on efficient and sustainable solutions. And we have not yet seen these opportunities materialize into orders, but there is a big potential here.

In the Industry segment, we have historically been dependent on a couple of OEM customers in Surface Mining and Underground Mining. And we are successfully working on reducing that dependency by targeting new customer segments and geographies as well as with our service offerings, but this has not yet been enough to balance out the slowdown during the quarter from those customers.

Talking about our profit level, our adjusted profit increased 72% to EUR 3.7 million for the quarter. And with a combined EUR 10 million in profit for the January to September period, we are well in line with our announced plan for long-term profitability.

It is encouraging that our focus on quality in our orders had not impacted sales, with revenues remaining stable year-over-year. I believe another clear sign that we are tracking to our plan is that we generated EUR 7.7 million in operating cash flow in the quarter, an increase of almost 80%.

And with that, let me now hand over to Glenn to talk about the quarter in more detail.

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [3]

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Thank you, Mikael, and good morning, everyone. Following along from what Mikael said, we're focused on locking in the benefits of the transformation, the second phase of our turnaround plan. Critical part for us in the second phase is to deliver consistent performance. And on that specific point, we've now delivered 3 consecutive consistent quarters.

Now to update you about our third quarter. On the top line, we continued to take orders at a value in excess of our reported revenue, and we maintained stable revenues, also in line with our expectation. And on that stable revenue, profitability and cash generation are consistently showing the benefits of the transformation that we expected.

Now addressing each of these items in more detail. Firstly, order intake was just over EUR 50 million for the quarter and was significantly better than the same quarter last year, the especially good performance in Ports & Maritime, as you heard Mikael talk about earlier.

What I would like to add is that the intake, like I said before, also exceeds the revenue line and it was in line with last 12 months' performance.

The development of our orders has shown less volatility than the prior year, something we hope to continue with our theme of growing our flow in repeatable businesses such as Services.

The order book continued to grow and at the end of September was almost 10% higher than the one we entered the year with and 2% higher than the end of the prior quarter.

We're happy with our closing order book in Ports & Maritime, but one area of focus for us is to improve the order intake and book in Airports & Industry.

And turning to our top line compared to the same period in 2018, revenues decreased slightly in the quarter to EUR 48.4 million. However, looking at our performance so far this year, we're pleased that we have delivered the same revenue as the prior year to hold the line on the revenue. This in itself may not sound very impressive, but it is encouraging for us to be in this position after an intense period of transformation and also considering the prior history of declining revenues since 2014.

We are delivering a different mix of revenue this year. In line with what I said before on order intake, there is growth in the Ports & Maritime division, offset by a reduced revenue in Airports & Industry. Our closing order book suggests a continuation of that development for the rest of 2019.

Looking at our profitability, we're happy to report that the adjusted EBIT increased to EUR 3.7 million, corresponding to a margin of 7.6% in the quarter. And like I said before, we've now delivered 3 consistent quarters of consistently improving financial performance.

The higher margin is explained by the savings achieved through the restructuring program announced last year, leading to an improved profitability on the stable revenues.

We've also maintained consistent profitability with the changing mix in revenues compared to prior year, specifically, like I mentioned before, prior Ports & Maritime and Service revenues offset by lower Airports & Industry revenues. We've demonstrated this mix change so far does not impact our overall margin performance. EBIT for the quarter amounted to EUR 3.1 million, corresponding to a margin of 6.4%.

Now turning finally to our cash performance. We had a net operating cash inflow of EUR 7.7 million in the quarter. This is more than our reported EBITDA in the quarter. As a consequence, we also reduced our net debt for the quarter by almost EUR 8 million. And by reducing our net debt, we improved our leverage ratio at the end of September to 0.79x and that compares to 1.42x in the previous quarter and to 3.75x at the end of 2018.

If I say on the theme of cash, for the year to September, we've generated a positive operating cash flow of EUR 5.3 million. I'd just like to emphasize on that number that this is after paying EUR 8.1 million in the second quarter for the previously announced one-off settlement of an old case in the U.S.

Excluding the impact of the large one-off payments in the year to September, we achieved a positive operating cash flow of EUR 13.4 million and that represents nearly all of our reported EBITDA. At 30 September, we had EUR 13.6 million of cash on hand and approximately EUR 46 million of undrawn loan facilities. And I'd just like to mention that our current senior facility expires at the end of June 2020, and we expect to close a replacement facility in the first quarter of 2020 based on this good financial performance that we're reporting today.

In summary, we've now delivered consistent financial performance for 3 quarters in a row in 2019.

And with that, I'd like to hand back to you, Mikael.

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Mikael Norin, Cavotec SA - Group CEO [4]

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Thank you, Glenn. In conclusion, we are progressing in line with the plan for the transformation of Cavotec that we drew up almost 2 years ago now. And with the transformation winding down, our focus for the rest of the year will be to further expand our Operational and Commercial Excellence programs on continued control of costs and on leveraging the refocus of our sales force to growing geographies and customer segments that we've been working on as well as the continued buildup and rollout of our services offering.

The market is there with mega trends such as environmental concerns, electrification and automation at the forefront of our customers' minds. We have the ability to offer products and solutions that meet the challenges our customers face in these areas. And we will now have a solid position to capitalize on that market potential.

That concludes our prepared statements, and we are now happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Karl Bokvist from ABG Sundal Collier.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [2]

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A lot of positive things to be developed here during this quarter. I would like to start off at the top here. So if we talk about the orders and correct me if I'm wrong here, but I think you said that you expected the second half order intake to be lower than the first half. I was just wondering if is this still valid given that you saw such a strong development in Q3.

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Mikael Norin, Cavotec SA - Group CEO [3]

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We -- and you know that, Karl, that one quarter, especially when it comes to order intake, one quarter can vary from the other when it comes to especially our large orders. So our target is to continue to hold the line when it comes to orders and revenue, that's what we said for 2019.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [4]

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All right. And if you could share some detail here, where -- are there any sort of larger orders that you could highlight just to get some insight into the magnitude?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [5]

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When -- are you talking about Q3 specifically, Karl? Or...

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [6]

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Yes, correctly. Just sort of trying to understand the split between sort of the underlying smaller orders and if there were any particular larger one-offs?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [7]

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Yes. I think the pleasing aspect of Q3 actually is that we continue to see very strong interest in orders in MoorMaster, our automated mooring offering to the market. And that's maybe a continuing theme from earlier this year as well. So like I said earlier, the development of the business this year is more towards the Ports & Maritime where we have higher order intake and higher revenue compared to prior year and the opposite in Airports & Industry. That same thing is continued inside the Q3 order intake.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [8]

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Understood. And we talked about this before here, but have you seen any negative effects from increasing competition from, for example, the likes of Trelleborg within this automated mooring solutions?

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Mikael Norin, Cavotec SA - Group CEO [9]

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We haven't seen any negative effects of that at all. And as I've said before, fundamentally, we think that competition in an area like this, which is still a new technology for most customers is actually good because it means more people out there in the market preaching the same message. But we have not seen that impact our market success rate in any way so far.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [10]

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Understood. And then if you could shed some light on the -- of course, you talk about mining here, but also if we just could discuss the general industrial demand? And also I'm a bit curious about cable reels towards more poor technology, I mean, excluding MoorMasters and all sorts of new technologies or solutions that you have?

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Mikael Norin, Cavotec SA - Group CEO [11]

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Yes, as we commented on in the report, we have seen a slowdown when it comes to our traditional OEM customers in Surface and Mining. But it is important to remember at the same time that we have a lot of unserved customers and customer segments there as well. So we are -- as part of our Commercial Excellence program, we are rebalancing our sales force from a geographical point of view, but also from a customer point of view. So we believe that we have a large potential also when it comes to other customer segments within the industry. And we're working hard to make sure that we are not as dependable on a few customers in that segment.

When it comes to -- yes, sorry, about Ports & Maritime, I mean, we continue to see a good activity level sitting in that market. There are still numerous, very large investment programs going on in ports around the world, first, driven by the need to become efficient, but also what really helps us is also a focus on sustainability and on automation as well. So we don't see the sort of any slowdown in global trade impact in those plans at the moment.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [12]

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Understood. And then just a quick question from me before the final one. Your customer dependency as of now, is it so that you have one larger customer accounting for more, for example, 10% of sales? I'm just curious on your customer concentration.

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Mikael Norin, Cavotec SA - Group CEO [13]

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No. Well, no, we don't. We have a pretty wide variety. I guess you're thinking about in our Industry segment. We've a pretty wide variety of customers, but we would like to increase that further because we see potential there. Our geographies, for example, in North America and South America, where we have not really been active before and where we know that there are customers who just from the initial approach that we've had with them that are interested in our solutions. So it's a long term to have as wide customer base as possible. That's our approach.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [14]

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Okay. And then finally, in terms of just seasonality, now I'm thinking about the several aspects, both sales, profitability, but perhaps, mainly cash flows and working capital release because I think the last 2 years, we've had quite big working capital releases in the fourth quarter. So if you could just help shed some light on just the seasonality across the different line items?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [15]

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Yes. Thanks for the question, Karl. I think you heard me say in the summary before that we're really focused on consistent financial performance. That consistency also applies to the cash flow. The focus we have on the cash flow means that we want to continue to report a good cash flow compared to our profitability and that's what we're focused on. I don't see Q4 sticking out as a high release of working capital, predominantly because we've been focused all year on consistent cash performance, not a year-end rush, I suppose, if that's how it may have impacted the business in the past. For now, I would say, it's not like we're going to see some step change from -- in cash performance in Q4. It's going to be continued consistency.

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Mikael Norin, Cavotec SA - Group CEO [16]

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If I can add to that also, there is no underlying seasonality, really, in our business, if you look at it from a customer point of view. I think it's more about how this organization has operated in the past when that sort of rush that Glenn was talking about. And that's why we're moving away from and trying to be more consistent in our performance, not least towards our customers.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [17]

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All right. I have a couple more questions, but I'll get back in line first.

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Operator [18]

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(Operator Instructions) And we have a follow-up from Karl Bokvist from ABG Sundal Collier.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [19]

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All right. So if we could just perhaps talk a bit about your savings. When you first announced your restructuring plan, I think you said that you wanted to be quite front-loaded in terms of achieving P&L net savings. So could you just give some indication of how much of euros we have actually seen during the year and how much more we could perhaps expect for the rest of 2019 and also into 2020?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [20]

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Yes, sure, Karl. I think the summary, I would say, is we're pleased with the result of the restructuring program so far. And I think the evidence of good progress on that is already clear in the P&L. We're well on track to deliver the target savings that we promised when we announced the program, and I think after year-end, we'll look at how we're performing, and depending on what the outlook is then and the progress we've finally booked and achieved during the year, we can maybe update again on perhaps the speed of the achievement of those savings, which we said we're going out to 2021. But specifically about the front-end loading question, we're really happy with the progress we've made so far in relation to the overall plan that we announced. It's time-wise ahead of the tracking that we had in mind.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [21]

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Yes, okay. And then perhaps some more specific Q4 question here. The Q4 '18 was -- well, there was a lot of moving parts inside that quarter and you, Glenn, had also just stepped in. So I'm just thinking here what should we expect in terms of a year-over-year improvement here on underlying margin improvements and so on?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [22]

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Yes. I think, first of all, we shouldn't use Q4 last year as an indication of what to expect this year. As you alluded to, Karl, that was right on the top of announcing a pretty major restructuring program. And we just talked about that restructuring program. So now, it's still that while we focus on consistency and performance, which I've talked about, as you know, the performance can vary from one quarter to another. So we're happy with where we're at right now. And we're still focused on consistency.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [23]

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All right. And if we look at year-to-date margins on an adjusted level, you are already quite close to 7%, which is your margin target within 2 years. So could you just elaborate a bit on this and what you are seeing going forward? And also, I mean, in relation to the 10% margin that you have within 4 years, I think you said and combine this, perhaps with where you see the most potential for growth next year?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [24]

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Yes, Karl, thanks for the question. Like we've said, we're happy with our performance so far. But the targets that we announced, we had in mind that we'll be setting those on a kind of an annual basis, not single quarter performance. It is so that we're progressing well towards the 7% adjusted EBIT margin target, as you said. And a bit like I said on the restructuring program, after the year-end when we booked all of the performance inside the fourth quarter, we'll take a look at how we're performing against those targets that we announced. And depending on the outlook then, the macroeconomic one and also our own business performance, we'll review our targets. But I think it's a bit early to be talking about the full year out ones on this call for sure.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [25]

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All right. And then just -- so you mentioned Services here, just out of interest here, how much of sales in Services at the moment?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [26]

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We haven't, as you've seen in our reported -- reporting separate -- separated out the Services business, but in line with what we've said during the update. We're pretty pleased with how that business is developing. It's also pretty clear from the results that there's demand in our life cycle support from our products and customers. And then finally, 2019 is a year of buildup for the -- and rollout of the Services business. So we anticipate that we'll be able to report on how that business is developing, starting in 2020. But the key message is we're really happy with how it's developing at the moment.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [27]

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Understood. And finally, 2 just quick more technical questions here. What do you think in terms of the effective tax rate going forward? It was 24% in Q3, but it was 37% in Q2. I'm just thinking how one should think about the long-term tax rate.

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [28]

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Yes, yes. So the -- you just quoted a couple of figures there. I mean you're right, the effective tax rate in Q3 was 23%. And yes, Q2 was higher, I think Q1 was lower. And that's affected a bit by the mix of the different jurisdictions, the profits coming from and the various projects that we have. In summary, when we talked about this at the end of the second quarter, the tax rate was around 30% -- just over 30%. Year-to-date now, it's 27% and maybe as I indicated in the past couple of quarters, the effective tax rate per quarter will vary depending on the mix of jurisdictions, but I think that year-to-date number is a pretty good indication of where we're at.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [29]

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All right. And then restructuring charges, you took some charges here during Q3. Will there be any more into Q4 and also into 2020?

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Glenn Withers, Cavotec SA - Group Senior VP & CFO [30]

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Yes. Again, it's consistent with what I said in the last quarter, Karl. We definitely expected the spend in H2 to be much less than the first half. And we already -- that's already, as you said, evidenced in Q3. At the moment, there's still some more cost to come, but it won't be any more than Q3. And we certainly -- as we've said, we're well on track to completing the restructuring side or the transformation of Cavotec. So we will definitely see much less than 2020.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [31]

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Congratulations on a strong third quarter.

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Mikael Norin, Cavotec SA - Group CEO [32]

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Thank you very much, Karl.

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Operator [33]

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And as there are no further questions, I will hand the word back to the speakers for any final comments.

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Mikael Norin, Cavotec SA - Group CEO [34]

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That is it. Thank you, everyone, for tuning in, and have a great Friday and a good weekend, eventually. Thank you.

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Operator [35]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.