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Edited Transcript of COOR.ST earnings conference call or presentation 7-Nov-19 9:00am GMT

Q3 2019 Coor Service Management Holding AB Earnings Call

KISTA Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Coor Service Management Holding AB earnings conference call or presentation Thursday, November 7, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Klas Elmberg

Coor Service Management Holding AB - IR Director

* Mikael Stöhr

Coor Service Management Holding AB - President, CEO & Director

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Conference Call Participants

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* Karl-Johan Bonnevier

DNB Markets, Research Division - Analyst

* Klas Danielsson

Nordea Markets - Equity Research Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Coor Service Management Q3 Report 2019. Today, I'm pleased to present President and CEO, Mikael Stöhr; and CFO and IR Director, Klas Elmberg. (Operator Instructions)

Speaker, please begin.

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [2]

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Thank you very much, and good morning, everyone. Thank you very much for signing in and listening in to us here at Coor with our Q3 report this morning.

Kicking off for the first slide, for those of you who are still new to us here at Coor. Coor, we are the -- a Nordic -- leading Nordic facility management company. We're market leaders in integrated facility management across the Nordic region. Over the last 12 months, we've turned over some SEK 10 billion with a profit level of SEK 533 million, that's around 5.2% EBITDA margin over the last 12 months.

We have around 11,000 employees, and that is recalculated into the 8,814 FTEs that you can see on the slide. Those FTEs are spread out throughout the Nordic region in the way you see on the pie charts to the right. Some -- 49% of the business turnover, that is in Sweden; 25% is in Norway, the second largest market for us; and the third largest is Denmark with 19%; Finland, the smallest country for us at Coor, at 7% of the turnover.

At the bottom pie chart there, if you slice Coor by contract type, 60% of what we do that's integrated facility management, large, integrated multi-service contracts; and some 40% of what we do that is single service, focused on cleaning, property service and food and beverage. That's Coor in a nutshell.

Then moving on to the next slide and into the third quarter figures. In the third quarter, we saw a substantial increase in operating profit, strong cash flow, and we also finalized the acquisition of a cleaning company in the northern part of Sweden, Norrlands Miljövård.

Now if we run through the slide and look at the numbers. For Q3 organic growth, we came in at 5% growth in the quarter. We grew in all countries, except Finland. Sweden came in with strong growth; Norway, strong growth; Denmark, solid growth; and in Finland, we had a decrease in volumes. Two reasons behind that. One is the cancellation of the Ericsson contract in Finland from last year, and the other is a cancellation of low-margin or very low-margin contracts in the -- during the year, which gives then effects -- negative effects on the volumes but which are positive from a profit point of view, as we'll see when we come to Finland.

All in all, 5% growth in the quarter, organic. There's no acquired growth for us in this quarter. Moving down then into the EBITDA margin at 5.1% in the quarter, a clear step up from the Q3 in 2018 when we came in at 4.3%. So the step up this year, that also gives an increase in EBITDA in absolute numbers of around 25%. All countries contributing to the improvement in EBITDA, and also, all countries improving their EBITDA margin, except Denmark, which is flattish compared to the same quarter last year.

Cash conversion. Both the cash conversion and the leverage numbers, those are LTM numbers. Strong, solid cash conversion after the first 9 months in this year. LTM number about 105% takes us down to leverage of 2.6% after Q3. So that's the quarter numbers.

Then moving into what that takes us over the last 12 months, we're showing organic growth of 7% and an acquired growth of 5%. Now adjusting for some rounding effects, that takes us into 12% total growth over the last 12 months with an EBITDA margin of 5.2%. And the cash and the leverage, of course, they're LTM numbers so they would be the same. Those are the key numbers for us.

Moving on to the next slide, business highlights in the third quarter. We've seen another strong quarter with successful renegotiations. As those of you who followed us for some time know, this is a key item for us to continue to prolong and make sure that we have satisfied customers that decide to stay on with Coor is a key metric for us. So very happy to -- in the quarter or announcing just after the quarter, prolongations of a number of substantial contracts for us. Volvo Cars in Sweden and in Belgium, a broad IFM contract where we service all of Volvo's production and administrative sites in Sweden and in Belgium with a broad set of services.

Aker Solutions in Norway, again, a broad integrated contract. We serve Aker in some 10 locations, production and administrative sites across Norway. And VELUX in Denmark, again, a broad IFM agreement, serving VELUX across a number of Danish locations. So all in all, when you calculate these 3 and some other smaller prolongations, also, it's around SEK 500 million or SEK 0.5 billion of yearly volumes prolonged in the quarter. So very happy about that.

Second bullet on the slide, also an item of highlight for us in the third quarter. Lots of work had gone into integration of major contracts that we won earlier in the year, and that are ramping up now as we move into the fourth quarter. Danish Police in Denmark, that's, again, a broad IFM contract. We won this earlier in the year. And those of you who've listened in to us before know this was all a combination of the prolongation of a large contract for us, and also a substantial expansion of that contract into not only the police but now also the Public Prosecution Authority and the Prison Probation System in Denmark.

So the last part of this contract starts up now in Q4 in November 1. So a lot of preparation work for that startup has gone into the third quarter. Same then for the second dash there under integrations in ICA in Sweden. ICA, that's a Swedish food retail chain, and we won a broad IFM contract with them earlier this year. Lots of work gone into in Q3 of integrating and preparing for the start-up, which also happened on November 1. And we're now servicing ICA in offices and logistics centers all across Sweden.

Finally, from a highlight perspective, on the slide, the last bullet. We finalized the acquisition of the cleaning company, Norrlands Miljövård. Another acquisition that we believe is a perfect match for us at Coor. Norrlands Miljövård is a -- or was a family-owned business before with a long history in the market. They were founded in 1973. And they've had a focus on cleaning services in the northern part of Sweden, strong focus on high-quality types of services and sustainability in what they do, so a culture that we believe fits very, very well into how we think about service and a long-term business perspective at Coor. We're a perfect match, we believe, and the deal was closed on October 31. So from November 1, again, this is now part of the Coor family, and we are very happy to have Norrlands Miljövård as part of Coor.

Moving on from the highlights to the next slide, running through country by country, starting on Sweden. Sweden came in at 6% growth in the quarter and an EBITDA margin of 7.6%. Very strong uptick in the margin as you'll see from the third quarter last year, over a full percentage point up in Sweden. The growth -- the 6% growth in Sweden comes from a couple of different sources. One is NKS, the hospital here in Sweden, which is still in a ramp up -- or the final part of the ramp up phase of our contract with them. There's also a continued set of high variable volumes and the ramp up of new SME contracts. So those -- a couple of moving parts that create the growth in Sweden.

The substantial margin improvement we've seen in Sweden in the quarter is also driven by a couple of different things, a clear sign of the efficiencies that have gone into Sweden and created efficiency all across the organization, but also higher margins on variable volumes in the third quarter, specifically compared to the third quarter last year. We have talked for a number of quarters now also in Sweden about the negative margin effect from the prolongation with Ericsson that we did last year. We're seeing, in the quarter, a declining effect of this negative impact. And we expect that as we move throughout the year that that effect will be completely gone. That's in Sweden.

Moving on to Norway, again, strong growth in Norway. Organic growth of 6% and an EBITDA margin of 6.9%, a small uptick from 6.8% in the third quarter last year. Organic growth in Norway, that comes from project volumes across the board, basically in the Norwegian contract portfolio and also the new contract with Storebrand that we started up last year still contributes positively in the growth perspective. Margin wise, in Norway, a couple of moving parts there. Positive effects from variable volumes, again, and from efficiencies that have gone into -- across the board in Norway on the positive side. On the negative side, margin wise, a contractual price adjustment for a large customer in one of the large prolongations we made in Norway last year. So that's on the negative side. On the positive side then, the variable volumes and efficiencies. All in all, a small uptick in the margin in Norway.

Moving on to Denmark. Denmark organic growth of 3% in the quarter and EBITDA margin of 4.2%. Organic growth, of course, of the 3% should be compared to the super strong growth we've had as comparisons in Denmark. Last year, we grew substantially both organically and with acquisitions. So I think it's a sign of strength that we're continuing to grow in Denmark, mix of SME contracts that have been ramped up and also the expansion of the Danish Police contract that I talked about just now.

Margin wise, we're seeing positive effects in Denmark this quarter from an increased focus in continuous efficiencies across the board in Denmark. Those are partly offset then by costs for integration of the new and renegotiated contracts and the ramp up of the police that is now ongoing. So again, a couple of different moving parts on the margin in Denmark.

Finally, Finland. Organic growth of minus 8% and an EBITDA margin of 5.6%, again, a strong uptick in margin but a decrease in volume. And as we talked about, the volume perspective in Finland comes from 2 sources. One is the negative effect of the closure of the Ericsson-Finland delivery from last year. There are still some effects in that and also termination of a couple of contracts with very, very low margins in Finland. So of course, that also flows then into the margin effects, positive effects from closing down low margin contracts, negative effects from the Ericsson close down. Net effect is then still an uptick in margin in Finland.

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Klas Elmberg, Coor Service Management Holding AB - IR Director [3]

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All right. Then if we look at the P&L, we see that the net sales for the quarter is close to the SEK 2.5 billion, which gives us a growth of 5%. It is close to 5% in organic growth and a very small positive impact on the FX effect. No acquired growth in the quarter, as Mikael mentioned before. EBITDA is up to SEK 127 million, a significant increase of SEK 25 million compared to Q3 last year, which takes us to an EBITDA margin of 5.1%, well above the 3% -- 4.3% from last year.

The margin improvement, as mentioned before, is mainly driven by Sweden, even though we see positive contribution from other parts as well. And in Sweden, it's the efficiency across the organization and improved margins on the variable volumes compared to Q3 last year. Financial net is minus SEK 16 million and with taxes of minus SEK 14 million, we get to a net income of SEK 40 million. And then an adjusted net income of SEK 86 million when adding back the amortization.

Going then to the LTM numbers. We see that we are close to the SEK 10.2 billion in net sales, which is the growth of the 12% mentioned before, 7% organic and 5% acquired growth. EBITDA for the LTM is SEK 533 million, which then takes us to an EBITDA margin of 5.2%. And the adjusted net income for the net -- for the last 12 months is then SEK 353 million.

Going then over to the cash flow for the last 12 months. We started off with a cash balance of SEK 335 million. Operations have contributed with SEK 664 million over the last 12 months, which is a very strong number and an improvement compared to the previous quarters. The financing flows, reflecting interest, loans and leasing from the IFRS 16, adds up to minus SEK 91 million. We have taxes of minus SEK 45 million. And then we have returned SEK 380 million in dividends to our shareholders. This then takes us to an outgoing cash balance of SEK 483 million.

Moving then on to some of the cash flow details and start by looking at the changes in net working capital. As mentioned before, we have seen a strong improvement of SEK 106 million for the last 12 months mainly driven by high continuous focus on working capital across the entire organization and then process improvements in certain entities where we have seen room for improvement. We also have the positive calendar effect this quarter as the quarter ended on a Monday compared to ending on a weekend last year.

CapEx continues to be on a level of 0.7% of net sales, and this takes us to an operating cash flow of SEK 732 million and then translates into a cash conversion of 105%, which is well above the target that we have. And last but not least, some highlights from the balance sheet. The net working capital is minus SEK 573 million, equaling minus 5.6% of net sales. And with the SEK 483 million in cash and SEK 375 million of leasing debt from IFRS 16, net debt is just below SEK 1.9 billion, and that gives us a leverage of 2.6.

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [4]

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All right. The final slide from us here today, summary of the Q3. Growth wise, 5% organic in the quarter, no acquired growth, takes us as an LTM number then to 12% total growth over the last 12 months. EBITDA margin, 5.1% in Q3, 5.2% over the last 12 months. Strong cash conversion with 105% over the last 12 months. And we're continuing to see interesting business opportunities across the Nordics both in the larger integrated area and also in single services across our home markets.

So with that, we'll open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Klas Danielsson from Nordea.

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Klas Danielsson, Nordea Markets - Equity Research Associate [2]

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Can you hear me?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [3]

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Yes. We can.

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Klas Danielsson, Nordea Markets - Equity Research Associate [4]

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Fantastic. So Klas Danielsson from Nordea here on the behalf of Henrik Mawby. So first off on Sweden and Norway. So I understand approximately half of the organic growth is driven by variable volume growth. So previously, we talked about -- or that will be understanding that the margins of these volumes are somewhat dilutive in Sweden and accretive in Norway. Could you maybe quantify the profitability in these contracts compared to the fixed revenues? And maybe touch upon what's been driving the increase in profitability and the -- as well.

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Klas Elmberg, Coor Service Management Holding AB - IR Director [5]

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All right. If we start by Sweden, we say that the margins in the quarter in terms of variable volumes are slightly better than last year in Q3. And the reason behind that, I mean, it depends a lot on when the timing of the projects comes in, if we have available owned resources and so on. So that can be either positive for the margin or actually negative for the margins. We still want to do the projects, of course, and support our customers, but it can go both ways, actually. And this quarter in Sweden, it was a positive effect compared to last year.

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Klas Danielsson, Nordea Markets - Equity Research Associate [6]

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Okay. So fantastic. So then secondly, you had the effect of the Karolinska contract driving growth from a number of consecutive quarters now. So maybe you could give us some color on where we should expect this to be in full effect?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [7]

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Sorry, which contract was that?

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Klas Danielsson, Nordea Markets - Equity Research Associate [8]

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The Karolinska contract in Sweden, the NKS.

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [9]

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The NKS contract. I mean that is now fully ramped up. So I think what we're seeing in the quarter here are the final components of that.

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Klas Danielsson, Nordea Markets - Equity Research Associate [10]

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Okay. Fantastic. So another one on the paid taxes, I mean, you had quite a disparity between the taxes booked on the P&L and the taxes paid. So I mean how long can we expect to see this difference as well?

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Klas Elmberg, Coor Service Management Holding AB - IR Director [11]

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I think we can see a difference for the near future but not for a long time.

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Klas Danielsson, Nordea Markets - Equity Research Associate [12]

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Okay. Fantastic. And so finally, the new contracts with Aker and Volvo, is this -- are these purely extensions of previous volumes or have you kind of increased the scale there as well?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [13]

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The main part of those are extensions of existing volumes.

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Operator [14]

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Our next question comes from the line of Karl-Johan Bonnevier from DNB.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [15]

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A few questions for me, if I may. First, looking at the 5% organic growth, could you try to split it up in variable volumes and what's contract ramp ups? Because if I read through the lines, it sounds like variable volumes is not really driving that organic growth to the same extent as it used to.

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [16]

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I mean, obviously, it is a mix, and it's a little bit hard to quantify exactly the split between them, but about 50-50, I would say.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [17]

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Excellent. And coming back to your comments about the Swedish variable volumes and margins being better year-on-year, if I remember correctly, you said in Q3 last year that variable volumes were dilutive. So should we say that variable volumes now are contributing something that is more normal to it? Or you're seeing that you are getting an excess profitability out of them in this quarter?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [18]

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It's more normal.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [19]

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Excellent. Looking at this -- I looked at the underlying mix between FM and IFM in the quarter, and I saw FM was declining for the first time. Obviously, the comps there was quite heavy from last year. But looking at FM volumes, have you taken a more, say, cautious view on taking those on for the moment? Or is something else happening there?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [20]

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No. Not really. I mean there's no change in our view on this. We're -- as you know, the focus for us is to grow in the Nordics and to grow in IFM and FM. And we're happy to take on -- when we find a contract that we believe we can win and do well on, we'll take that on. So I think that's more of a -- when you see those shifts, that's more of -- that's the way it's going to be over time. There are going to be shifts back and forth. Our push is still into both of those 2 areas.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [21]

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Excellent. And looking at these new extension contracts that you signed now during the quarter with Volvo, VELUX and Aker Solution, obviously, it's a great mix for having all countries contributing there. Have you seen any major change to payment terms or pricing levels in these contracts? Or is it kind of more normal situations there?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [22]

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Very normal situations, I'd say. So nothing out of the ordinary. And we've been in -- as we like to do, we -- as you know, we go to our customers well in advance of agreements expiring and move into discussions with how we can support them in the future and sit down with Coor and the customer, and that's exactly what we've done in these situations.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [23]

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So none of them has been seeing a full competitive kind of situation and existing clients have been willing to, say, have a dual discussion just with you?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [24]

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Exactly.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [25]

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Excellent. And looking at payment terms, obviously, one of your major competitors have had challenge in -- when they have renegotiated contracts on payment terms. Clients asking for longer and longer and trying to compensate it with factoring and clouding up the working capital situation. Could you just elaborate a little how you have been able to have such a, what I'd call, excellent working capital management in the quarter and then with these kind of things happening in the general market out there?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [26]

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No. I think we've seen -- we saw a push for longer payment terms. But that was a number of years ago that our portfolio sort of went through that renegotiation. And it's not something that we're seeing, again, in our part of the world and in our types of contracts in the region. So it's always on the table in the negotiations, but it's nothing out of the ordinary. And we're seeing -- we are not seeing any trends towards worse payment terms for us as a supplier.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [27]

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Perfect. Then on the Danish Police contract in Denmark. I'm also surprised to see that the organic growth in Denmark didn't pick up more on the back of that. But are the new volumes in that contract fully ramped up in this quarter? Or is that an effect that we'll see in the coming quarters?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [28]

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Yes. No, they're not, the new volumes. The way that that contract works is that a big portion of the contract, of course, is a prolongation of existing volumes, and that's what you're seeing in the quarter. The new volumes, the absolute majority of those, they started on November 1.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [29]

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Perfect. And I think you previously talked that that was an effect of high single-digit organic growth for the Danish operation when those were fully ramped up. Is that -- do I remember it correctly?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [30]

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So the extended volumes, they are around -- yearly volumes are around SEK 150 million. So the new part of that contract is around SEK 150 million.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [31]

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Excellent. Then a final one for me. Looking at -- going into 2020 and seeing now, say, operating organic growth moderating slightly, and then margin now is becoming more of a driver of your absolute EBIT. Is that the kind of trend we should see in -- you're thinking 2020 with your kind of outlook for this moment, maybe slightly lower organic growth than we have seen in recent past and better margins coming up to your financial targets?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [32]

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I think you should absolutely expect that the core machine works that way that when growth comes down, there will be more effects of all of the -- more visible effects of all of the efficiencies that we push through with the portfolio. So margin should then come up, as we've seen also historically. Coming off then some very high growth over the last number of quarters now. We see numbers of 10% organic growth, and then another 10% of acquired growth, of course, that puts a lot of pressure on the organization. So as growth comes down into more normal levels, we will have a lot more time to work with efficiencies internally. And just as you said, that should rightfully be a driver of profits for us.

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Operator [33]

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(Operator Instructions) We appear to have no further questions at this time. So I'll hand the conference back to you, sir.

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [34]

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Okay. Thank you very much. Thank you very much, everyone, for listening in today. And we look forward to meeting, I guess, some of you over the coming days. Thank you very much.