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Edited Transcript of CEMI.MI earnings conference call or presentation 5-Mar-20 4:00pm GMT

Full Year 2019 Cementir Holding NV Earnings Call

Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Cementir Holding NV earnings conference call or presentation Thursday, March 5, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Francesco C. Caltagirone

Cementir Holding N.V. - Chairman & CEO

* Marco Maria Bianconi

Cementir Holding N.V. - Corporate Development, M&A and Business Integration Director

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Conference Call Participants

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* Emanuele Gallazzi

Equita SIM S.p.A., Research Division - Research Analyst

* Matteo Bonizzoni

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Tobias Alfred Woerner

MainFirst Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Cementir Holding 2019 Full Year Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Marco Bianconi, Head of M&A and Investor Relations of Cementir Holding. Please go ahead, sir.

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Marco Maria Bianconi, Cementir Holding N.V. - Corporate Development, M&A and Business Integration Director [2]

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Thank you. Welcome everybody to Cementir Holding 2019 Full Year Results. I'm here with our Chairman and Chief Executive, Francesco Caltagirone. We'll be ready to answer your questions during the Q&A session. You have received the presentation. So going quickly through the documents. Turning to Page 2. Give you a flavor for the highlights on our full year results.

Revenue reached EUR 1.2 billion, up 1.3%, including a EUR 33 million incremental perimeter change for 3 months of Lehigh White Cement, our U.S. subsidiary consolidation in 2019 compared to the previous year. On a like-for-like basis, revenue declined by 1.4%, mainly due to a significant drop in revenue in our Turkish subsidiary, only offset partially by other regions.

Our EBITDA was up 10.6% to EUR 263.8 million, including a EUR 25.5 million of IFRS 16 impact, a EUR 3.7 million Lehigh White Cement additional contribution and EUR 6.4 million asset revaluation in Turkey. There was a higher contribution from all regions with the exception of Turkey, with a major increase in our Nordic & Baltic and Belgium regions. EBITDA margin was up 180 basis points. Group net profit declined to EUR 83.6 million. This was due to a comparable figure, which included EUR 40.1 million for our Lehigh White Cement stake revaluation and EUR 20 million from mark-to-market of commodity hedging.

Net financial position reached EUR 239.6 million, including EUR 84.3 million impact from IFRS 16.

Turning over the page and going through our subsidiaries, starting with Nordic & Baltic, which accounts for around 51% of our EBITDA. In Denmark, trading was pretty good with domestic gray and white cement volumes up by 5% and 10%, respectively, from last year, with domestic prices in line with inflation.

White cement exports were moderately up. Gray cement export were down due to lower deliveries, mainly in Norway and Iceland. And average export prices were up. RMC volumes were more or less flat with prices up with inflation. EBITDA was up double digit to EUR 15.9 million, of which EUR 10.4 million were due to IFRS 16. Norway recorded a soft year with sales volume slightly down due to declining public and residential constructions, with the exception of the Oslo and Bergen area with prices outpacing inflation.

In Sweden, it was a mixed year with the RMC volumes down and prices slightly down, and aggregate sales and volumes up.

Turning over the page to Belgium and France, Page 4 of your documents, you can see that gray cement and clinker volumes were up more than 10% with strong sales in Belgium, France and the Netherlands; and prices up in Belgium and minor increase in exports. RMC volumes were down in Belgium and flat in France, whereas aggregate volumes were slightly down because of very strong comps from last year.

Prices up in aggregate due to better product mix. EBITDA was up strongly by EUR 13.5 million, of which EUR 4.3 million were from IFRS 16 impact. This is despite the higher costs for the second kiln restart in Guarain.

Turning over to Page 5, North America, our results were altered by 3 additional months in 2019 compared to 2018. The market in the U.S. was hampered by unfavorable weather conditions, mainly in Texas and New York State; and there was also a stiffer competition in some selected states; in other states with a strong demand for white cement. Prices were in line with the previous year. And EBITDA was up to EUR 24 million, including EUR 4.5 million from IFRS 16.

Turning over the Page 6, Turkey. Here, clearly, this was a tough year for Turkey. Domestic gray cement volumes were down by 24%, only partially offset by higher exports.

Domestic prices also were down in local currency. We should be noting that in the last 4 months of last year, domestic market bounced back with volumes up 22% year-over-year. RMC volumes also were down for 2019 by 41%, also due to the closure of some plants, with prices in local currency up by more than 15%.

Our waste management business enjoyed better revenue in industrial waste, whereas urban waste reported slightly lower revenue. Clearly, the Turkish lira devaluation of 11% versus the euro and the sharp drop in volumes impacted our EBITDA severely, together with an increase in main fuels, electricity and personnel costs. We have to remind that EBITDA includes EUR 6.4 million of asset revaluation, and if we look at just the industrial EBITDA, the decline in 2019 from the previous year was EUR 20.3 million.

Turning over the page to 7 on Egypt. We can see that the country has stabilized in terms of security, in Sinai, and therefore, the business enjoys good volume recovery, with domestic prices in local currency going up significantly. Export volumes increased by more than 20% to all main destinations. Therefore, thanks to operating leverage and higher domestic prices, but there was a sharp increase in EBITDA to EUR 6.3 million from EUR 3.2 million of last year.

Moving on to Asia Pacific, which accounts for 9% of our EBITDA. 2019 was a good year in China, where strong white cement and clinker volumes in the domestic market pushed up EBITDA by 22.3% from 2018. In Malaysia, it was a better year with white domestic cement showing a solid improvement and higher average selling prices, whereas export cement increased, thanks to better sales due to the Philippines, Vietnam and Cambodia and Australia; lower export of clinker in India and Australia. Overall, EBITDA increased by 18%, thanks to better sales mix, despite a slightly negative Forex effect.

And lastly, Italy, where, I remind you, we have mainly our trading company, Spartan Hive, we can see here a strong increase in EBITDA, mainly due to the activity of this trading company, which commercializes cement and clinker to group companies and third parties.

Turning over the page to 10 on the financial results. You can see here that there is a sharp decline in associates because Lehigh White Cement moved to a line-by-line consolidation.

And net financial expense was $25.4 million. We have to note that the previous year result was heavily influenced by EUR 40.1 million impact of our Lehigh White Cement stake revaluation as well as over EUR 20 million impact of positive mark-to-market commodity hedges. Whereas this year, the figure includes a EUR 4.4 million hit from negative exchange rates and EUR 1.5 million of interest rate -- interest on lease liabilities arising from the initial application of IFRS 16.

On Page 11, you can see our cash flow bridge. If you take the EUR 255.4 million net debt figure at the end of 2018 with a pro forma adding the EUR 84.3 million of the IFRS 16 impact, you can see the cash flow generation has been significant of EUR 100.1 million over the 2019, which brought net debt down to EUR 239.6 million at the end of last year.

So the main figure you have here, you can see also that there was a significant improvement in working capital that is a positive cash inflows.

Then lastly, on Page 12, there is our guidance. You can see that we expect 2020 revenues to be in the range of EUR 1.27 billion with an EBITDA of around EUR 270 million. We expect the net financial position at the end of the year to be around EUR 180 million, after a CapEx of EUR 86 million, of which EUR 12 million in sustainability and EUR 5.6 million of digitization CapEx.

Clearly, these forecasts do not include any evaluation, which at this stage would be premature on the impacts on world, regional and sector economic growth from exceptional events, such as COVID-19.

If any of those significant elements will emerge in the coming months to materially impact this guidance, we'll be updating this guidance accordingly.

Just a comment on the next slide, Page 13, 14 and 15 are just illustrative of what we've said that we are committing a significant portion of our market cap with a EUR 100 million investment in sustainability and digitization, and we also clearly stated a target of reducing our CO2 emissions by 30% by 2030.

So I'm not going to go through those slides. I will leave the floor to our Chairman and Chief Executive, Francesco Caltagirone, for any questions you may have. Thank you.

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Questions and Answers

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Operator [1]

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So are you ready for questions?

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Marco Maria Bianconi, Cementir Holding N.V. - Corporate Development, M&A and Business Integration Director [2]

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Yes, we are.

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Operator [3]

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(Operator Instructions) The first question is from Matteo Bonizzoni with Kepler.

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Matteo Bonizzoni, Kepler Cheuvreux, Research Division - Equity Research Analyst [4]

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I have a few questions. First one is regarding extraordinary CapEx. So for 2020, you say you will do only, let's say, EUR 18 million out of total EUR 100 million in the 3 years. So just what is your indication also for 2021, '22? So it means that basically '21 and '22 would be much higher than this is more '21 or '22, just to model the estimates on CapEx. And financial charges, quite high, excluding the EUR 4 million, EUR 5 million of ForEx, in any case, is EUR 20 million. I guess that there is some derivative impact, if you can clarify? And also going forward, what amount of financial charges should we expect?

Then another question is on Italy, because Italy posted a sharp improvement of the EBITDA, EUR 8 million. It's trading company, Spartan Hive, plus other activities. Can you clarify exactly what is in the Italian perimeter?

And out of this EUR 8 million, I think that there is also IFRS 16, how much in Italy because in the press release, you have not mentioned. Tax rate was quite high, 28.6%. It is above the 24% to 25% that you say. Why? And going forward, would it normalize?

And finally, Turkey, there was a nice inflation after many quarter of drop in Q4. Do you expect to continue? And Belgium comes from a pretty strong year in which the EBITDA increased by around more than 50% in 3 years. Do you expect this to stop in 2020 and going forward?

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [5]

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Okay. Yes. The first question was about the extraordinary CapEx. Yes, in 2020, will be EUR 18 million. And then will be another EUR 32 million in 2021 and the remaining part in 2022.

So the financial charges are linked by, let me say, hedging, not hedging, but is, let's say, we have part of the debt, as you can imagine, in dollars for the acquisition of Lehigh White that has been completed in early '19, '18. And also, there is, unfortunately, we have, let me say, after the acquisition of CCB, begun the -- some credit lines that we, today, as you can imagine, don't use. But it's very difficult also to place money with a positive return.

So unfortunately, we have a mismatch that will end next year, probably in May or June, where, let's say, our net financial position is EUR 239 million. But let's say, it is -- we have EUR 500 million of debt and EUR 250 million of cash. And unfortunately, on the cash, in the last 12, 18 months, the return is close to 0. So we pay interest on EUR 500 million because of the credit line that we took when we acquired CCB for 5 years and partly is financed in dollars. So the rates are, let me say, 1.75% higher compared to euro because the financing for Lehigh White has been taken in.

In Italian, results are mainly, let me say, linked to Spartan Hive trading. There is no IFRS 16 impact. It's pure trading in cement, clinker, pet coke, additives, spare parts. So it's a wide range of where, let me say, we deal from Italy for the entire group and also we deal also for third party.

About the tax rate, this year is higher for a one-off tax that we included in Belgium. And so we think that we are -- think that from this year, the tax rate will go back below 24%. It's like in Belgium, what we have in Italy, like IMO. So we have a one-off that hit the balance sheet, unfortunately.

Turkey has, let me say, showed a lot on the last quarter, sign of recovery. Even in the first 2 months of this year, the recovery seems to continue. We have also, let me say, have to take in account that the Turkish lira continue to devaluate.

So when we report in euro, the results are, let me say, adjusted for this devaluation. And I think that it's premature to think that -- to see if, let me say, the Turkish crisis is finished, but for sure, there are a sign of bottoming, as I already told you, even in the last quarter when we had the conference call for the third quarter.

Belgium, I don't remember on Belgium. Sorry, can you repeat the question?

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Matteo Bonizzoni, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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Yes, basically, in 3 years since you bought the company, you increased the EBITDA by more than 50%. So is it because of overheated market? Or basically, should at least keep this level of profitability?

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [7]

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We think that -- let me say, the market is so far because as we don't know what will happen in the future about this COVID-19, but so far has been very supportive, especially in the aggregates.

In the aggregates, we serve the Paris -- the Belgium, but also the Paris market. And we think that the infrastructure for Le Grand Paris, the Olympic games should, let me say, continue in the next few years. So if there are no external, let me say, factors, we think that -- I don't think that in the next 2 years, we can increase another 50%, but that's, let's say, also with the investment that we are going to make in next year in the kiln to upgrade one kiln and to close the other one should increase the profitability.

So -- and we should increase the usage of alternative fuels from 40% to 80%. And this, too, should, let me say, increase for Belgium, probably another EUR 6 million or EUR 7 million of EBITDA. I mean that is, I think, from the second half of 2022 when, let me say, the upgrade of the kiln will be completed.

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Operator [8]

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The next question is from Emanuele Gallazzi with Equita.

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Emanuele Gallazzi, Equita SIM S.p.A., Research Division - Research Analyst [9]

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I have a couple of questions. The first one is on the U.S. market. You mentioned severe weather condition, more competition and slower growth in residential and commercial sector. What should we expect for this market in 2020? And for China market, if you can just give us an update about this market in the last few months?

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [10]

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Okay. From China, we have been forced to close the plant for 3 weeks. Now the plant is in back normal operation in the last 2 weeks. Let's say that of these 3 weeks, we have already planned, let me say, not the normal maintenance. So let me say, for us, the shutdown has been, let me say, prolonged only for 1 week. For sure, we are at, let me say, nearly 300 kilometers from Wuhan. We didn't experience any, let me say, positivity from COVID in our, let me say, labor force. The market is recovering. It seems that the measures put in place from the Chinese government are working. And even if, for sure, in the first 2 weeks, the market, the sales are a little bit subdued, but let me say, we forecast a much heavier impact. And it seems that in a couple of months, if this recovery continues, we will be back on track in budget. So I think that by the end of April, we should recover, let me say, our normal trajectory.

Even we have to consider that due to this, let me say, prices, there has been a huge destocking. And now, let me say, there are -- with the all plants around China that are opening all together, we are, let me say, requested to ship a lot of cement, especially farther from the plant. So there is a local market, as you can imagine, because it's close to Wuhan, it's still subdued, but the market far from Wuhan is, let me say, speeding up, let me say, the request. And...

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Marco Maria Bianconi, Cementir Holding N.V. - Corporate Development, M&A and Business Integration Director [11]

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U.S. market.

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [12]

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The U.S. market, last year, has been, let me say, hit by unfavorable situation in the weather in our, let me say, core markets and by some extra effort. We think that we also changed at the beginning of the year, the top management. As you know, when you buy a company, you need some months or some quarters to adopt. And we think that this year, we should be on line with our, let me say, forecast. And also, we think that one of the importance that was an Egyptian is facing problems with quality, and probably, they will lower the import to United States.

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Operator [13]

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The next question is from Tobias Woerner with MainFirst.

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Tobias Alfred Woerner, MainFirst Bank AG, Research Division - Research Analyst [14]

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Can you hear me?

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [15]

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Yes.

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Tobias Alfred Woerner, MainFirst Bank AG, Research Division - Research Analyst [16]

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Just a couple of questions from me. The cash generation was very strong this year. As a result, net debt has come down. I mean can you talk to us about potential acquisition opportunities? And what the pipeline looks like? And in this respect, if you're focusing on any particular regions or products for potential acquisition opportunities?

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [17]

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Yes, even if our leverage is already very, very low and should be close to 0 in a couple of years, at the moment, we don't have any acquisition in sight. Our main target is to complete this upgrade from the environmental point of view to invest this EUR 100 million. And also, as already mentioned in the past, our only, let me say, possibility to expand the white cement is to build a greenfield in Southeast Asia.

We have already, let me say, targeted a couple of opportunities, but also due to the, let me say, the awkward situation in China and in Saudi, we have, let me say, frozen the situation.

So as soon as, let me say, the normal situation will be back, we should, let me say, continue this opportunity. And as I already told, we are talking about an investment of EUR 100 million, EUR 110 million spread over 3 years. So let's say that even if in the second half of this year, we will restart, let me say, to deal with the counterpart, then, let me say, it's something that can materialize, probably in the second half of 2022, is a couple of years, 2 years, 2.5 years of construction. So today, frankly speaking, is something that we can see any result from these greenfield from 2024, '25. That today is our -- out of our, let me say, budget or industrial plan.

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Tobias Alfred Woerner, MainFirst Bank AG, Research Division - Research Analyst [18]

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Okay, great. And just in relation to the Nordic region, it looked like some of the trading conditions in 2019 were mixed. But looking forward into 2020, there are some big infrastructure projects starting to ramp up. Can you maybe just talk us through your outlook for the region, both from a pricing and volume perspective?

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Marco Maria Bianconi, Cementir Holding N.V. - Corporate Development, M&A and Business Integration Director [19]

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Yes. I'll take this question. Thank you. Yes, there are a number of infrastructure projects that are due to kick in during this year. So although clearly, this region has been trading quite well over the past few years, we do not expect a significant improvement going forward. It's just a moderate rate of increase in terms of volume. So you're talking low single-digit volume increase, with prices generally in line now with inflation. This is Denmark.

In Sweden, we see a bit of a stronger market for 2020. Therefore, mid-single-digit increase. Although, we have, mainly in Sweden, ready-mix and aggregates. So they sometimes have different trajectories. But at the moment, we see both going in a positive direction.

As far as Norway, as you know, 2019 has been a soft year and probably in 2020, still is the country where in our Nordic landscape, we have more caution on because it's been going very strongly for a long time. And in some areas, it's probably overbuilt. And -- but overall, it is a very solid country with solid fiscal fundamentals.

And in those regions, because of climate, there is also a very high consumption of ready-mix, which is our product. So overall, we expect a very low volume growth in Norway with sort of flattish, slightly up pricing. So overall, I would say 2020, barring any unforeseen shock to the economy, given that these countries tend to be very open to international trade, we expect another year of progress in both sales and EBITDA.

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [20]

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I can add to that part also of the recovery in profitability, we think will come, for sure, from energy deflation and also the deflation of the logistic costs. That will, let me say, benefit the entire sector not only ourselves. But -- so even if the market will remain more or less flat, we think that on the cost side, we should, let me say, have a few savings.

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Tobias Alfred Woerner, MainFirst Bank AG, Research Division - Research Analyst [21]

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Great. Just one last question. Can you just talk to us about any potential organic expansion opportunities in terms of maybe plant expansion or other opportunities that you have at the group, just over the next couple of years?

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [22]

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As I said that today, we don't have -- and I'll -- let's say, I'm not, let me say, starting any possibility -- possible, let me say, deal to enlarge the growth plan.

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Operator [23]

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(Operator Instructions) Gentlemen, there are no more questions registered at this time.

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [24]

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Okay. So thank you very much for your interest in Cementir Holding, and we look forward to speaking with you in the next few weeks.

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Marco Maria Bianconi, Cementir Holding N.V. - Corporate Development, M&A and Business Integration Director [25]

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Thank you. Have a nice evening. Bye.

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Francesco C. Caltagirone, Cementir Holding N.V. - Chairman & CEO [26]

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Bye-bye.

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Operator [27]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.