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Edited Transcript of COLUM.CO earnings conference call or presentation 22-Aug-19 11:00am GMT

Half Year 2019 Columbus A/S Earnings Call

Copenhagen Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Columbus A/S earnings conference call or presentation Thursday, August 22, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hans Henrik Thrane

Columbus A/S - CFO & Member of the Executive Board

* Thomas Gregers Honoré

Columbus A/S - CEO, President & Member of the Executive Board

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Conference Call Participants

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* André Thormann

ABG Sundal Collier Holding ASA, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to today's Columbus H1 Interim Report Call. (Operator Instructions) I must advise you the conference is being recorded today, Thursday, the 22nd of August, 2019.

I would now like to hand the conference over to your speaker today, Thomas Honoré. Thank you, and please go ahead, sir.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [2]

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Thank you, thank you very much, Rose. My name is Thomas, and I'm the CEO and President of Columbus. I'm here today with Hans Henrik, who is our Corporate CFO for Columbus. We'll start the presentation by looking at the highlights of the first 6 months, followed by an income statement. Then we will present our financial value drivers and the geographical and business segments. Afterwards, we will cover our expectation for 2019, and our long-term guidance. And finally, we will open the Q&A session.

Let's go to Slide 5 to begin the presentation. Columbus closed the first half of 2019 in line with last year. Revenue amounted to DKK 977 million, which is at the same level as last year. If we isolate for the SAP ERP business and Columbus last year, which was divested in 2018, Columbus delivered an organic growth of 2%. EBITDA amounted to DKK 102 million, which is a growth of 7%. EBITDA is impacted by a decline in EBITDA in the U.S. business and continued the deflation cost of iStone, however, positively affected by M3 and commerce businesses and the IFRS 16 impact. Columbus Care contract continues to show good progress, growing by 16% in the first 6 months. The integration of iStone is progressing as planned, and we experienced a very positive development across the business. In general, we see a good progress across Columbus, where especially our M3 business, commerce business and Columbus Care business showed great progress. However, we were challenged by a slow Q2, which we will come back to later in the presentation.

I will now hand over the conference to Hans Henrik, who will cover the income statement.

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [3]

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Thank you, Thomas. And as said, we reached revenue of DKK 977 million, which is at the same level as last year. And organically, we delivered a growth of 2%, as Thomas just mentioned. So the service revenue was also at the same level as last year, and Columbus software declined by 12% due to lower sales of perpetual licenses that

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Total external software was at the same level as last year. However, we see an increase in external cloud sales as -- and a decline in external perpetual licenses and the attached subscriptions. The development is, as previously announced. EBITDA increased by 7% to DKK 102 million. The development is -- in EBITDA is positively affected by the adoption of IFRS 16 compared to 2018. EBITDA is, however, negatively impacted by the development in the U.S. and the slow Columbus software sales, the mentioned product challenges and a slow business due to the prices in the U.K. Depreciation and amortization increased by 10%, again primarily due to the adoption of IFRS 16 but also due to our increased investment in our software development. Financial income is dropping, as well as we, in 2018, had an extraordinary currency gain on our contingency payments related to iStone. In 2019, we are amortizing the IFRS 16 lease as resulting in a technical financial expense. Further, we have financial expenses related to bank interest and currency exchange losses related to the iStone taxes. The net result before tax declined by 22% to DKK 50 million, and the reason for the decline are the ones we just mentioned.

So let's go to Slide 7, where Thomas will take us through our financial value drivers.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [4]

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Thank you, Hans Henrik. I will now present the financial value drivers and how we performed in the first 6 months of 2019. Let's look at the services business first. The services revenue amounted to DKK 753 million, which is in line with last year, primarily driven by an increase in Columbus Care services and progress, especially Denmark, Norway and Sweden, as well as the business areas, M3 and commerce.

Within customer work, chargeable hours showed a small decrease of 1%, just a point from 57% to 56%. The development is primarily caused by lower efficiency in Russia, U.K. and U.S. However, we see high activity in both our traditional ERP business as well as increased demand for our offerings within Cloud, Analytics and BI and Customer Experience. In general, we experienced good progress in the services business. However, due to some challenges we have mentioned, we are not satisfied with the development in our services business.

If we then look at the software part on the next slide. Columbus Software, sales decreased by 12% to DKK 49 million due to 3 key reasons. One, we had an extraordinary transaction in the first half of 2018. Second, we do see an accelerated decrease in perpetual license sales due to the cloud conversion. And thirdly, cloud sales are growing, however, slower than expected, which is due to the fact that customers initially subscribe to fewer licensees than they would normally do. Columbus Cloud increased by 44%, which is a very strong progress, however still lower than expected. We are convinced that our software sales will come back to positive growth during second quarter --second half.

Let's please move to Slide #10 for recurring revenue. The recurring revenue consists of Columbus Software subscriptions, external subscriptions, Columbus Care and Cloud revenue. In the first half of '19, recurring revenue increased by 6%, constituted 23% of Columbus' overall revenue. The progress is mainly driven by the growth in Columbus Care contracts, which grew by 16%, as well as an increase in total Cloud revenue of 47%. We consider the results satisfactory.

This was the reporting of our financial value drivers. I will now hand back the conference to Hans Henrik, who will present our business segments.

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [5]

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Thank you. And I'll start by taking you through Western Europe. Revenue grew by 6%. And in local currency, revenue grew by 8%. Western Europe is positively impacted by strong growth in Columbus region, Norway and Denmark. Our U.K. business normally shows strong growth rates. But due to the Brexit uncertainty, we have seen a slight decline in the U.K. during Q2. EBITDA increased by 31% to DKK 82 million. EBITDA is positively impacted by the revenue growth and the IFRS 16 impact, however EBITDA is negatively impacted by the investment in growth initiatives, the declining revenue in the U.K. and a slow progress on a major fixed price project we have in Norway. In light of the challenges just mentioned, we consider a very strong performance in the Western Europe. Thanks to our team of the Western Europe.

So next slide. So we are now at Eastern Europe on Slide 13. In Eastern Europe, revenue increased by 6% and in local currency, this increase was 7%. The progress is mainly driven by Columbus Russia, where we sell a wider set of offerings to our customers, which also impact our services business across (inaudible)

Columbus Russia grew the service business by 4%. And in Lithuania, we grew by 15%. And in Estonia, we grew the service business by 4%. So despite the positive development revenue, Eastern Europe ended up with a decline in EBITDA of 5%, which is only DKK 0.4 million. And the key reason for this decline in EBITDA is increase in staff costs in Columbus Russia. As Columbus Russia has staffed up as increased activity is expected going forward. The decrease is, therefore, partly due to timing. Software deals are moved from Q2 to Q3 in Russia, and it's expected to catch up on EBITDA during Q3 2019. Thanks to our teams in Baltics and Russia.

So now to North America on Slide #40. In North America, revenue declined by 14%, and in local currency, this decline was 20%. EBITDA declined by DKK 14 million, the decline is in line with previously announced expectation for the first half 2019. At the end of May, we on-boarded the new CEO for Columbus U.S., Chris Alagna. Chris has already demonstrated a promising ability to create the team spirit to drive the turnaround. We are executing a business plan to address the declining sales, which is the key reason for the decline in U.S. business. As part of this execution, we're adjusting our expectations to the performance in the U.S., and we expect to see declining revenue during the second half of the year. It is needed to say that U.S. is currently a challenge to our all financial performance, but with the team we have in the U.S. we are determined that U.S. will be back on track again, however, it will take longer than the first estimate. Thanks to the team in the U.S.

Columbus software business on Slide 16. Our software business is behind last year due to a lower sale of the perpetual licenses than expected. Columbus software license declined by 57%, which is mainly due to the cloud conversion. This year, we see limited perpetual sales but most sales are now converted to cloud sales. Therefore, we see good promise in cloud revenue growing with 34% growth. Despite this growth, Cloud is growing slower than expected to cost customers, initially subscribed to fewer licenses than we estimated. HiGH Software is fully integrated to our software company To-Increase, and we have a strong sales pipeline for Android solutions, which is -- which enable us to sell into larger customers. On the product side, we see strong performance on the A/S products for biz, rapid value dynamics anywhere and the inwards workflow, which grew with 30%, however, the remaining product suite is behind last year's growth numbers. We are satisfied with development in our software business thanks to our software team. So now I'll hand back the conference to Thomas, who will take you through the guidance for 2019 as well as our long-term guidance.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [6]

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Thank you, Hans Henrik. I'm at Slide 17. We expect revenue in the range of DKK 2 billion, corresponding to a growth of 6%. We expect EBITDA to be in the range of DKK 240 million. Software revenue guidance is expected to be in the range of DKK 110 million, corresponding to a growth of 8%. Dividend is expected to be unchanged with 10% on nominal share value -- share capital.

Let's go to Slide 19 for our long-term guidance. As with our guidance for the year, we maintain our long-term guidance for the next 3 years. Columbus will continue to grow organically through the execution of the 9 Doors to Digital Leadership. And our ambition is to grow the business at a compounded average rate of between 3% to 5% each year. We maintain the long-term guidance on the addition to reach 25% recurring revenue in 2021. Further, we expect to continue our 10% dividend policy. These were our long-term financial guidance items.

I will now hand back the conference call to our operator today, Rose. And we will take questions from the audience. So Rose, back to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of André Thormann of ABG.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [2]

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Yes. Maybe just to start off somewhere in terms of the integration cost of (inaudible). How much do you expect for the full year for this?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [3]

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I think we will expect to see in the range of DKK 10 million for the full year in that ballpark. So that is our current expectations.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [4]

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Okay, okay. That's great. And then another thing. In terms of M3 and commerce, which I understand goes quite well, is it possible to give some kind of indication of how much this amounts to for the cloud?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [5]

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We don't release that information. So that is not possible under the given circumstances, but it is significant numbers for our business.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [6]

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Okay. Then maybe going somewhere else. In terms of the software, which has been declining. Can you maybe just elaborate on whether this is something new you see, or it's a continuation of what you already have been seeing in Q1 and end of last year?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [7]

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It is a continuation of development that we have seen for the last few years and which we anticipate will continue for a few years. And as we have said before, we do not expect to have any significant license revenue in 3 to 5 years. So it is a development that all software companies see where the business is converting from a perpetual license sales to a cloud license sales.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [8]

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Okay. But still, I understand (inaudible) the quarter. So maybe can you elaborate on why the quarter was maybe worse than expected in terms of software?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [9]

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Well, it was primarily because we had a few larger transactions where customers wanted to buy perpetual license that did not happen. And therefore, we were a bit surprised to see the development. Maybe I can also add to that, because last year, we did anticipate -- we actually realized that it was possible to maintain a relatively high degree of perpetual sales. So when we made our plan timing in October, November last year, we said, okay, maybe we'll take it -- the buying trend out there will be slower, slower conversion to cloud. But then what we experienced here in Q2, now it's sort of -- it is accelerating. So the discontinuation of selling perpetual licenses has declined, combined with the planning we were doing.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [10]

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Okay. Maybe just elaborating on your answer, Thomas, in terms of these larger transactions that didn't happen, why was that?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [11]

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It was simply -- some deals were postponed, especially in the U.K., where we had a few transactions that was postponed, which also plays into the story about the license sales and pressure impact. So (inaudible) were postponed, not lost, but postponed.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [12]

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Okay. Not lost, okay. So it was primarily in the U.K. that these were coming from. That makes sense. Then -- and all understanding on the Columbus software in general, I thought that we should see this segment grow going forward. And as I understand, we really haven't seen the segment grow at least not for the current year. Why should we see it grow going forward? What should drive this?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [13]

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So it grew last year. And we have announced a revenue of DKK 110 million this year with expectation, which is an 8% growth. And it's because we have a big -- it's one of our priorities to grow the software revenue, and we invest a lot in developing our software revenue. And we have a strong portfolio with a strong value proposition to customers. And so it means that customers, they need our software to make better projects and less-riskier projects for our customers.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [14]

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Okay, okay. But there is -- I mean it's -- the reason why we would have seen a decrease this year has solely been due to problems in U.K. and the U.S.?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [15]

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No. The primary reason for the software declining is as we recognize revenue differently. Yes. We don't see any structural problems in our software business besides that. It's -- the software business is driving. We are selling a lot of software in connection with our older solutions, and we like that business. But it is being recognized in a very different way, which is causing the decline.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [16]

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But what I don't understand it's just that, I guess, you have -- you already knew that you would recognize this last year and maybe a bit before that in a different way then. And I also understand that Columbus Software declining for the first half year has surprised you, so it's not something else than recognizing it differently.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [17]

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So let's -- so we're talking about the license revenue that declined from DKK 13.4 million to around DKK 6 million. And we are talking about subscription declined from DKK 27 million to DKK 25 million. At the same time, we see cloud going from DKK 6 million to DKK 8 million. So this is a development that was anticipated. But you can also see that we are talking about relatively small numbers here, where the percentage difference can be pretty significant. So this could be, for instance, 2 deals that we anticipated for the year of our first half, which was moved into second half. So it's pretty big swings that can happen in our software business. So generally, it is developing as we anticipated. But of course, there can be differences within the quarters. We maintain our software guidance, and we expect to have a strong software year this year based on the pipeline that we see.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [18]

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Okay, okay. Great. Very clear. In terms of then moving to something different than software. If we take the chargeable hours, I see it being the same on this 56% as in Q1, even though it goes a bit down than in H1 2018. I mean does that indicate that Brexit, U.S., Russia has been -- have had approximately the same impact in Q2 as in Q1?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [19]

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Didn't really understand your question. Can you please repeat?

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [20]

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Yes, yes. So the chargeable hours on this 56% are the same percentage amount as in Q1, right? So I'm just trying to understand whether Brexit, U.S., I obviously know you also saw in Q1 in Russia and these other things. Is it the same picture you have in Q2 as in Q1? That's just my question because you have the same chargeable hours rate as in Q1.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [21]

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Yes. Generally, that's the same situation. If you look at -- they had a very slow Q1 in terms of services and chargeable hours, it picked up during second quarter. U.S. was still low. U.K., some parts of the business was high, some parts of the business was not so high. But generally, it's the same trend as we saw in Q1.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [22]

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Okay, okay. But then, what I'm just trying to understand is what did really surprise you in this quarter? Because U.K., you know about. You knew about U.S., you knew about, Russia, you knew about -- then there is Norway, I also think you knew about. So what surprised you in Q2? Or was this in line with your expectation that it would be weaker?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [23]

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I don't think we are surprised by this stage when we know we have the issues in U.K. and U.S., and that we know we were ramping up in Russia. So we are surprised by the numbers for chargeable hours here. So I don't know if that's surprise to you. I don't think we have expressed that we're surprised by this number.

I don't think that we have expressed that we are surprised. We have said that we are considering everything okay with the first half performance, despite that we had a soft Q2, and we give 4 very distinct reasons for a softer Q2. Would we have liked it such to be a stronger Q2, definitely. Do we understand why? Yes. Those are the 4 reasons that we outlined in the announcement.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [24]

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I totally understand and of course also totally fair if you are not surprised. But I just understood that these 4 reasons since that you state for the weaker Q

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also have been going on in Q1, which was a strong quarter. So then, I was just trying to understand whether you already expected that the Q2 would be weaker? Yes. But that's as I take it. Then

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Can you give any indication of the impact of this in Q2?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [25]

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No. We don't disclose that information.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [26]

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But is it major impact or small?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [27]

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It is major impact or else we would not have mentioned it.

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Operator [28]

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(Operator Instructions) There appears to be no further questions at this time. Please continue.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [29]

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So I think that covers the conference for today. We thank you for your participation. And we are looking forward for the investor updates tomorrow at ABG, where we start our road show. So thank you very much, and thank you for participating. Rose, over to you.

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Operator [30]

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Thank you, sir. Ladies

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let's conclude our conference for today. Thank you all for participating. You may now disconnect.