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Edited Transcript of COLUM.CO earnings conference call or presentation 6-Nov-19 12:00pm GMT

Q3 2019 Columbus A/S Earnings Call

Copenhagen Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Columbus A/S earnings conference call or presentation Wednesday, November 6, 2019 at 12:00:00pm 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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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Q3 Interim Management Statement Conference Call. (Operator Instructions) Must also advise your meeting is being recorded today on Wednesday, the 6th of November 2019. And I would now like to hand the meeting over to you speaker today, Mr. Thomas Honore. 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 very much. My name is Thomas, and I'm the CEO of Columbus. I'm here today with Hans Thrane, who is our corporate CFO. We will start the presentation by looking at the highlights of the first 9 months followed by an income statement. Then we will present our financial value drivers and our business segments. Afterwards, we will cover our expectations for 2019 and our long-term guidance. And finally, we will open up for a Q&A session. Let's go to Slide 5 to begin the presentation.

We had a strong Q3, where we delivered 5% organic growth. Year-to-date revenue grew by 3% organically, where especially Columbus Care and Columbus M3 showed strong progress. EBITDA amounted to DKK 165 million, which is a growth of 48%. The services business grew by 4% organically, which is an organic growth of 6% in Q3, isolated.

Columbus Care contracts continues to show great progress, showing a 20% in the first 9 months of growth. If we look at Q3 isolated, Columbus Care grew by 28%. Columbus Care also continues to show great progress, growing by 54% year-to-date.

In general, we see good progress across Columbus business units. In Q3, the majority of our business units delivered growth, where especially our M3 Columbus Care businesses stood out with double-digit growth.

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 we just mentioned, we have had an organic growth in Q3 year-to-date of 3%, which is when we exclude the SAP e-business and Columbus Latvia we divested in 2018. And reported growth is 1% in Q3 year-to-date, about DKK 1.4 billion. The service business is growing 4% organically and reported growth of 2%, which is also without the divested activities. EBITDA increased by 48% to DKK 165 million. And if we isolate for the IFRS 16 effect, EBITDA grew by 19%. So the EBITDA is also positively affected by other operating income and negatively affected by a provision for a cost to complete on a larger customer engagement.

Depreciation and amortization increased by 29% to 60 -- almost DKK 67 million and is primarily affected by the amortization impact from the IFRS 16 regulation. And financial income is net declining with 77%, and that was due to the fact that we in Q4 -- no, Q1 in 2018, had an extraordinary currency gain on Swedish kroner and also the interest -- the interest element of the IFRS 16 impact. So all in all, that's the impact on financials.

Financial expenses increased by 128%, and this is due to the interest element of our IFRS 16 and due to the amortization of contingent liabilities. So we are satisfied with the results. So let's go to Slide 7, where Thomas will walk us through the 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. If you look at our services business, it is showing positive growth with a 4% organic growth. Reported growth is 2%, constituting a DKK 1.1 billion. The improvement is mainly driven by the increase in Columbus Care services and a general progress in our services business, where especially the business areas, M3 and commerce showed strong progress.

Within customer work, chargeable hours showed a small decrease of 2 percentage points, from 54% to 52%. The development is primarily caused by lower efficiency in Russia and U.K. However, we see a high activity in both our traditional ERP business as well as our increased demand for new offerings within cloud, analytics and BI and customer experience. In general, we experienced a good progress in the services business. We consider the results satisfactory and in line with our expectations.

Next slide, please. I'm now at Slide 9, regarding Columbus Software sales. Columbus Cloud sales increased by 54%, which is a very strong progress. Cloud now constitutes a larger part of Columbus Software sales than licenses, which is positive and expected development due to the cloud conversion.

Cloud revenue is more reliable and predictable than license revenue and is a result of a large software investment Columbus has undertaken to update our entire software portfolio to cloud solutions. As expected, Columbus Software license declined by 44%, but is also expected to pick up in Q4 due to a very strong pipeline and some large deals in process. Let's move to Slide #10 for recurring revenue.

Recurring revenue consists of Columbus Software subscriptions, external subscriptions, Columbus Care and cloud revenue. In Q3, year-to-date, recurring revenue increased by 7%, increasing from 22% to 24% of Columbus's overall total revenue. The progress is mainly driven by a strong growth in Columbus Care, as previously announced, with a growth of 20% as well as an increase in total cloud revenue of 50%. We consider the results satisfactory. This was the reporting of our financial value drivers. I will now hand over the conference to Hans Henrik, who will present our geographical and business segments.

Please go to Slide 12.

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

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Thank you, Thomas, and I will start by taking you through Western Europe. Revenue grew by 6% and in local currency, this increase was 7%. Western Europe is positively impacted by a strong growth in Columbus Sweden and Denmark. And in addition, we see growth in our U.K. business unit, which is growing by 4% in Q4 -- in Q3, despite the Brexit uncertainty.

Our commerce and entry business units also showed strong growth in Q3 with growth numbers of 17% and 18% in Q3, respectively. We also see growth in the sales of analytics and business intelligence, especially in our Danish business units. EBITDA increased by 79% to DKK 130 million and adjusted for IFRS 16 EBITDA increased by 54%. And as mentioned under the walk-through of the income statement, our results are impacted by an adjustment of contingent consideration and the provision for cost to complete a customer engagement. Thanks to our teams in Western Europe. So now we go through the next slide which is Eastern Europe.

In Eastern Europe, revenue increased by 8%, and the growth is driven by all entities in this segment. So in Russia, we had growth of 7%, Lithuania, 14%, and in Estonia, 9%, and EBITDA increased by 22% which is due to general revenue growth and IFRS 16 impact. Thanks to the teams in Baltics and Russia for a great performance. Next slide.

So now we are in North America. So we are in the process of a turnaround led by our new CEO, Chris Alagna. The turnaround will address sales and marketing, execution, deliver our organization and digital leadership offerings. We believe we are now in the right track and we expect to see positive growth during 2020.

In Q3, Q3 year-to-date revenue declined by 13% and this result is in line with our previously announced expectations. Thanks for our teams in the U.S.

So now we're at Columbus Software, Slide #15. Looking at Q3 isolated, we saw growth of 4% in revenue and 18% growth in EBITDA, driven by a strong performance on our products, advanced products management, invoice workflow security compliance studio and Anywhere logistics. We also saw a steady performance on business integration suite and rapid value in Q3.

In Q3, year-to-date, we've closed 78% more net new cloud contract value in Q3 compared to last year. However, as the sale of Cloud subscription is recognized on an ongoing basis instead of upfront at the time of sale and delivery, we are not able to fully recognize the closed contracts value as revenue.

Columbus software licenses declined by 4% to 6%, which is mainly due to the cloud conversion and EBITDA declined by 3%, which is also affected by the cloud conversion. We expect to see continued progress during Q4 due to a strong pipeline and some large deals in process.

We're satisfied with the development of our software business. Thanks to our software team.

So I'll now 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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Great. Thanks, Hans Henrik. We expect revenue in the range of DKK 2 billion, corresponding to a growth of 6%. And we expect EBITDA to be in the range of DKK 240 million, and we expect revenue from our software to be in the range of DKK 110 million, corresponding to a growth of 8%. Dividend is expected to be unchanged with 10% of normal share value -- share capital, excuse me. Now let's go to Slide 19 for our long-term guidance.

And we've maintained, just as we maintain our guidance for the year, we maintain our long-term guidance for the next 3 years. We will continue to grow organically through the execution of 9 Doors to Digital Leadership. Our ambition is to grow the business at a compounded average growth rate of 3% to 5% each year.

We maintain the long-term ambition to reach 25% recurring revenue in 2021. Further, we expect to continue our dividend policy of 10%, as just mentioned. These were our long-term financial guidance. So I will now hand over the conference to our operator for a Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a request 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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Just the first one, starting with this other operating income. Can you please elaborate what exactly this is? And whether it is included in your EBITDA guidance? Yes, start with that one.

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

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Okay. Thank you, Andre. Hans Henrik, do you want to take that question?

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [4]

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Yes. So the income on operating income is the -- when we recognize adjustments to contingent consideration on earlier acquisitions we do in Columbus, and this is normal and according to IFRS that when the assessment of what we, as management, believe we will pay in the future are to be adjusted, then it has to flow through the P&L.

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

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That was question number one. And regarding whether it is included in our guidance?

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [6]

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You can say, normally, we make a coherent adjustment of what we, as a business, can accomplish through a year. And there will be different elements in what goes up and goes down. But -- so you can say it's not directly included in the guidance because, otherwise, then we should have made a different assessment when we closed 2018 because you make that adjustment, when you think it has to be adjusted to the (inaudible) to that one has to be.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [7]

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So okay. So in the DKK 240 million, that's excluding the DKK 72 million from this other operating income?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [8]

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I think what Hans Henrik answers, and I understood your question that was it part of our original guidance. Was that the question? Yes, and it was not a part of the original guidance, but it is part of the DKK 240 million that we are guiding now.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [9]

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Okay. So -- okay, okay, okay. So it's part of the current guidance. Okay. And then just -- sorry for staying a bit on this. How is this allocated to the different locations?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [10]

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And what do you mean by locations?

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [11]

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So Western Europe, U.S., Eastern Europe and so on? Because I guess that they did have a positive effect on the EBITDA as well?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [12]

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Yes. So that has -- is allocated to the geographical segment called Western Europe.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [13]

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It's all in Western Europe. Okay.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [14]

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It's all in Western Europe, yes. And some of it in our ISB. So some of it is in Western Europe and some of it in ISB

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [15]

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Okay, okay. And just on the other thing, which you also mentioned in terms of this provision you have taken, how much do the -- does that amount to? And -- because I can see in your provisions on your balance sheet, there is an increase of around, what, DKK 20 million, DKK 25 million or something like that. Is that what is reflected here?

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [16]

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Yes. So we will not specifically disclose what that amount is, and that is due to that we are not interested to announce that to our competitors nor to our customers. So we are not able to give you that amount. And the numbers you are mentioning are not only impacted by this provision. So you can, of course, make your -- how should I say, your own assumptions there. But we have balanced what we are able and can disclose at this time.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [17]

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Okay. But just to be sure, it's -- in other provisions, you have DKK 42 million now, right? And what did you have in Q2, you had around DKK 16 million. I think. It's all -- I mean, all the provisions you have taken is reflected here, right? Or am I missing something?

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [18]

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I don't think I have any further to add because it can be both, yes. It can be in a number of accounts. So we have decided not to disclose further on that one, Andre.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [19]

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Okay, okay. That's fair. Okay. So just moving a bit forward in terms of M3 and commerce, which goes quite well. I mean, I think I recall you have given some numbers previously on this, can we get the revenue numbers here again on how much this amount to?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [20]

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Yes, we don't have it with us specifically now. We don't disclose it as such, but we take your request and note your request for later announcements.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [21]

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Okay. And then in terms of the chargeable hours because I know that it is at 52% now, right? And I'm pretty sure it was at 56% in Q2. So can you maybe elaborate a bit on this significant decline?

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [22]

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Yes. So there are a few explanations. One of them is a soft utilization in Russia and also in U.K. and of course, also a general low level in the U.S. However, we have hired a lot of people over the summer. For instance, we have hired 30 young graduates in our Swedish business. And of course, they are not becoming productive yet. They will be during the year. Well, that has a quite a big impact when you hire 30 young people and have to teach them first before they begin to invoice. So that is the reasons, a bit soft utilization and investment in people in several of our markets.

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [23]

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You're also comparing Q2 with Q3, and that is of course, also impacted, that Q3 is normally the vacation, the big summer vacation month in most units. When you compare it that way.

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

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Yes, yes, yes. But even year-to-date Q3 last year was at 54, right?

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [25]

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Yes. The reason Thomas gave was the year-over-year explanation. But when you then also compare it to second half of Q2, then it's also impacted, that Q3, normally, is a softer [visibility] quarter than when everyone has their main vacation.

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

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Yes, that makes a little sense. Just staying a bit on -- so what is going on in Russia? Why do you have lower utilization there?

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

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Because of -- we hire people, we hired lot of people. So as you can see, overall software, overall services revenue is increasing? Right? But we have more people to produce it. And therefore, the utilization becomes lower. So it is too low in our opinion, but it's not a reflection of a bad thing, it's just a reflection that we have hired people because we think that the demand will be bigger later in the year.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [28]

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Okay. And yes. So just the last thing about U.K. Are you seeing -- because I understand previously, you have communicated that some of your smaller clients in this segment have been holding back, but we actually see revenue increasing this quarter in U.K. So can you elaborate a bit on what's going on here?

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

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Yes. So generally, it's the same situation. We haven't had any finalization of the Brexit question. So customers in the lower end are still holding back, but we engage with some large enterprises, and they are not holding back. So generally, we see a good progress and a strong growth in Columbus U.K.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [30]

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Okay, okay. And then maybe the last question here in terms of the margin in U.S., is there anything specifically going on there? I see that you at least improved it from quarter-on-quarter.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [31]

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I don't know if you have anything to add before I...

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Hans Henrik Thrane, Columbus A/S - CFO & Member of the Executive Board [32]

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I think what we -- they seem to get some business in -- or close some business they could work on here in Q4. And then also, I think that was right in -- we had a reduction of a number of people in -- I think it was in July. So we reduced our staff costs quite a bit in July, which also, of course, gives a positive impact in EBITDA for the rest of the year. So it's a combination of cost savings and then more business than they anticipated when -- earlier on in the year.

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Operator [33]

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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 [34]

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Okay. Thank you very much. If there are any -- if there are not any further questions, let's conclude the conference. I would like to thank you for your participation. And I leave it over for you -- to you, operator, to close the call today.

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Operator [35]

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Thank you. With that, we conclude the meeting today. Thank you for participating. You may disconnect.

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Thomas Gregers Honoré, Columbus A/S - CEO, President & Member of the Executive Board [36]

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Thank you.