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Edited Transcript of COOR.ST earnings conference call or presentation 12-Feb-20 9:00am GMT

Q4 2019 Coor Service Management Holding AB Earnings Call

KISTA Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Coor Service Management Holding AB earnings conference call or presentation Wednesday, February 12, 2020 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 - CFO & IR Director

* Mikael Stöhr

Coor Service Management Holding AB - President, CEO & Director

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Conference Call Participants

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* Henrik Mawby

Nordea Markets, Research Division - Senior Analyst

* Karl-Johan Bonnevier

DNB Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Coor Service Management Year-End Report January to December 2019. Today, I am pleased to present President and CEO, Mikael Stöhr; and CFO and IR Director, Klas Elmberg. (Operator Instructions)

I will now hand you over to Mikael Stöhr. 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 for listening in to us at Coor here this morning. As always, we appreciate that very much.

Starting off then on the slide show for the first page, for those of you who are new to us at Coor, a very brief overview on who we are. We are a Nordic facility management company. We're leaders in integrated facility management across the Nordic region. In 2019, we turned over some SEK 10.3 billion with a profit of SEK 549 million EBITDA. We employ a little over 11,000 people across the Nordic region, and that translates into just over 9,000 FTEs across the region.

Two ways to slice Coor, as you can see on the page here, the top pie charts, slicing Coor by country, 50% of Coor, that's the operations in Sweden, 25% of Coor is in Norway, 18% in Denmark and 7% in Finland. The other way to slice Coor on the bottom pie chart is by contract type, 61% of Coor, that's integrated contracts, and 39% is single service contracts.

So moving on then into the numbers for the full year 2019 and the fourth quarter. We've closed the books on 2019, and it's another strong year for Coor. We continue to grow, and we show the all-time high EBITDA for the full year in 2019.

Starting off though with the numbers for Q4. As you can see there on the left of the slide, organic growth in the quarter of 3% driven by Sweden and Denmark in the quarter and adding to those 3%, an additional 2% of acquired growth. That's the company Norrlands Miljövård, the cleaning company we acquired in Sweden. We closed that deal in November. So November, December makes that a part of Coor as well. So total growth in the quarter of 5%.

EBITDA margin in Q4 at 5.6%, significantly up versus Q4 last year. You can see that 5.2% last year and 5.6% this quarter, and we will get into the pools of increase in margin when we go through the countries in a couple of the slides.

Cash conversion remains strong for us at Coor, 104% over the last 12 months. Leverage then comes in at 2.3 year-end. That's the Q4 numbers. Takes us in then to the full year numbers, we grew at a total of 7% in 2019, that's 5% organic growth, an additional 2% acquired growth with some FX effect that takes us up to a total growth then of 9%, including FX.

EBITDA margin for the full year of 5.3%. Again, the margin is up compared to the last comparable period 2018. We had a margin of 5.2%, so up for the full year. Cash conversion and leverage LTM numbers, so they're the same for the quarter and the full year. Takes us in then to the last number on this slide, the dividend that the Board suggests for this year at SEK 4.4 per share, that's SEK 2.2 as an ordinary dividend and an additional SEK 2.2 as a special dividend. In total, that's a 10% increase of the dividends compared to last year. So another strong year for Coor in 2019.

Moving on to the next slide for those of you following the slide show, business highlights for Q4 and, to some extent, also for the full year in 2019. First item on the slide, successful renegotiations. 2019 was another big year for renegotiation of existing Coor volumes. With the prolongation of Saab contract in Sweden in Q4, we concluded another strong year in terms of renegotiations. We renegotiated around SEK 2 billion of existing volumes in the year, and we prolonged 93% of those volumes. That takes the retention rate -- and for those of you who have followed us for some time, you know this is an important number for us to retain customers is good because it shows, obviously, that the customers like what we do. And it also allows us to work with efficiencies over time in our contracts. So 93% retention rate in 2019 is a good, strong number, we believe. And it's also satisfying to see that, that's the same number actually that we've now averaged in prolongations over the last 3 years. So 93% retention is also the same number on average over the last 3 years.

Second item on the slide, a key focus and highlight for us during Q4 has been a very strong focus throughout Coor on large integrations and the efficiency work that travels with those integrations. On the 1st of November, we closed the deal with Norrlands Miljövård, the acquisition of a cleaning company in Sweden. That brings in volumes -- yearly volumes of around SEK 250 million. That is now in full integration mode in our Swedish business.

Moving on to the Danish business, the Danish Police contract that was both prolonged and substantially expanded in the beginning of 2019. The last part, the expansion part of that contract came onstream also in November, so a large integration ongoing in Denmark as well in Q4.

Finally, then in Sweden, also the new contract with ICA, or ICA, that we signed just before summer. That also started up in November, so that's ramping up and being integrated in Q4. So across the business, large focus on large integrations and making sure that we get the efficiency out of those integrations.

Finally, on the slide, as a highlight that we're taking with us from Q4 and into 2020 is an interesting pipeline of new business as we look ahead. In the pipeline, as we move into the year, there are several interesting IFM opportunities across all of the markets in the Nordics that we expect that will reach the market in 2020. We're also carrying with us a solid pipeline for SME sales. So when we look at Q4 and look into 2020 with regard to new business, we are quite excited about the year to come.

Moving on to the next slide, country-by-country run through, starting with Sweden. In the quarter, an organic growth of 6% and additional acquired growth of 3%, so strong growth in Sweden in the quarter and, that, coupled with an EBITDA margin of 9.9%. And you can see that margin compared to last year, significantly up in the quarter. Growth in Sweden driven by new volumes, new contracts, the ICA contract that I mentioned that is ramping up at the end of the year. And there continues to be a high level of variable volumes across Swedish contracts. The margins improvement that we see in Sweden is driven by efficiency enhancement across the organization, so it's not one single pool of efficiency, but really a -- lots of hard work that's gone into the Swedish business, making it substantially more efficient today than a year ago.

Moving on to Norway. Q4 numbers, flat growth for the quarter and a margin that is up compared to the Q4 in 2018. We're seeing continued high and stable variable volumes across the Norwegian contract portfolio. And efficiency-wise, we're also seeing the more cost-efficient organization that was put in place in Q3 is now paying off in terms of margin improvement.

Moving on to Denmark. 3% growth in the quarter and an EBITDA margin that is significantly down to 3.7%. The growth comes from both new SME contracts that's come on stream in Denmark and the expansion of the Danish Police contract that we talked about on the last page. With respect to margins in Denmark, there are a couple of moving parts that, together, take the margins down in the quarter. One is that there are not enough efficiencies that have come through in Denmark after the last couple of years of very strong growth. There is a need for a second wave of internal efficiencies that is ongoing in our Danish operation. In addition to that, of course, there's also the start-up phase of the significant expansion of the Danish Police contract that is also, from a margin perspective, unhelpful in the start-up phase of the contracts. So 2 moving parts that take the margin down in Denmark for the quarter.

Moving on to Finland, organic decrease of 15% in the quarter, and an EBITDA margin that is positive, which takes Finland from a loss last year in Q4 to a profit in this year's Q4. The negative growth in Finland comes from 2 sources. One is the closedown of the Ericsson contract in comparison to the last year. That's a big hit for us in Finland, top line-wise. And there's also a couple of agreements with very, very low margins that we've moved out of throughout the year, which hits us on the top line. But again, that is very helpful then from a margin and an actual EBITDA perspective, that you can see come through on the bottom line in Finland in the quarter and for the full year. So that's the country-by-country run through.

Moving on then to the next slide, the contract portfolio development for the full year, and we thought we'd take you through the full year 2019. So starting to the left side on this slide, new contracts that we were awarded for the first half of 2019, the same number that we published then in our Q2 report for 2019, SEK 350 million of new volumes.

Contracts terminated in the first half of 2019 was SEK 40 million. That took the net change of our organic portfolio into plus SEK million 310 for the first half of 2019.

Now then moving in what's happened in the second half of 2019. We were awarded an additional number of contracts valued at around SEK 80 million per year. Contracts that were terminated in the second half of the year amounted to SEK 180 million, 10 contracts, as you can see, so there was no large contract, but rather a set of small and midsized contracts that were terminated in the second half of the year, takes the net change organically for the full year to SEK 210 million of yearly volumes added to the portfolio for Coor.

Now what's also happened then in the second half of the year is the acquisition of Norrlands Miljövård in Sweden, so that adds another SEK 250 million of yearly volumes. The net plus effect for the portfolio for the full year, that's a plus of SEK 460 million of new volumes, both organic and acquired for the full year 2019.

So that's the run-through of how the portfolio has developed throughout the year.

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

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All right. Looking then at the P&L, we see that the net sales for the quarter is slightly above SEK 2.7 billion. The increase is then close to SEK 120 million. And as Mikael said, it's mainly driven from Sweden. And the growth of 5% divided in 3% organic and 2% acquired growth.

The EBITDA increased by SEK 17 million from SEK 135 million up to SEK 152 million. And it's also here, Sweden, that is the main contributor to the EBITDA increase.

The margin up from the 5.2%, up to 5.6% in the quarter and with a financial net of minus 16% and taxes of minus 16 -- sorry, minus 17% and minus 16%, takes us down to net income of SEK 42 million. And then when you add back the amortization, you get an adjusted net income of SEK 90 million.

Looking then at the full year number. We see that we are reaching an all-time high in terms of net sales, SEK 10.3 billion, a total growth of 9%. EBITDA is up 12% from SEK 490 million to SEK 549 million, and that gives us an EBITDA margin of 5.3% compared to the 5.2% for the full year in 2018. And all the way down, we see that the adjusted net income is up significantly from the SEK 280 million to SEK 355 million for the full year of 2019.

Looking then at the cash flow development, we see that we started off the year with a cash balance of SEK 435 million. Operations have generated SEK 732 million during the year. The financing flow, reflecting interests, loans and leasing accounts for SEK 108 million -- minus SEK 108 million. We have paid taxes of SEK 45 million. And then cash out related to M&A is SEK 152 million. And last but not least, the dividend to the shareholders paid out throughout 2019 is SEK 380 million. So that takes us to an outgoing cash balance of SEK 497 million.

Continuing then and looking at some of the details in terms of the cash flow. We see that the changes in net working capital for the full year is SEK 101 million -- an improvement of SEK 101 million, and we're happy to see that focus on working capital remained strong within the organization.

CapEx is down, both in absolute numbers and as a percentage of sales. Right now, CapEx is actually below 0.7% of net sales compared to approximately 0.9% in 2018. This takes us then to an adjusted operating cash flow of SEK 781 million, and that translates into a cash conversion of 104%, as mentioned before.

And last but not least, some of the key figures from the balance sheet. We see that the net working capital is minus SEK 774 million, and that equals minus 7.5% of net sales. And with the SEK 497 million in cash and SEK 379 million in leasing debt, we had a net debt of just above SEK 1.7 billion, and that takes us to a leverage of 2.3, which is well below the target of 3.

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

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All right, summing up then this presentation. 2019 for Coor growth, a total of 9% growth for the full year, 5% organic, 2% organic (sic) [acquired] and then a couple of percent FX effect. EBITDA margin up in Q4 to 5.6%, up also for the full year to 5.3%. That takes the EBITDA in absolute numbers up 12% compared to last year. Cash conversion rate remained strong. And moving into 2020, we're seeing interesting business opportunities across the Nordic region.

And with that, I think we are ready for Q&A.

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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 Henrik Mawby from Nordea.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [2]

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A couple of questions from my side. Firstly, in Denmark, you highlight that the decline in profitability is primarily due to higher central costs for ensuring quality and support function. What is behind the need to invest in this now?

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

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Henrik, well, there's a need. As always, we put the delivery and the quality to our customers first. And as you know, we've come out of significant growth in Denmark in 2018, both organic and with the acquisition. And there was a need at the end of this year to reinvest in central functions, finance, group control and so on in the Danish operation to make sure that we can deliver what we promised. That's not something that we believe is something we will carry with us structurally, and that's what we mean with the second wave of internal efficiency that we believe will work through in the coming year.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [4]

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So we should view it as sort of a project cost in attaining those efficiencies. Is that how to look at it?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [5]

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In a sense, you could view that as a -- that type of cost.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [6]

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Okay. Continuing on Denmark, I was a bit surprised to see the low organic growth, despite, at least I having expected the Danish Police and prison system contract to add significant volumes. Has that not been a major thing in the quarter? Or have you had underlying declines in other parts of the business?

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

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There's a ramp-up of that as well. I mean the expansion of the contract started in November, and there is a ramp-up component to that. And the total volume of the expanded part of that contract is a total of SEK 150 million yearly volumes. So I think that is what you should expect for a full year effect in Denmark.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [8]

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Okay. And a couple of more. During the second half, as you alluded to in the presentation, you have lost SEK 100 million worth of contract in your portfolio. And so that brings it to quite a low net for the year, despite retention, as you mentioned, also being stellar. And that tells me one thing. It tells me that you've had a new sales program -- problem during the year. Why -- what do you think is driving the weak new sales?

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

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I mean new sales force, as those of you who have followed us over time, know that it consists of a couple of different components. And one is the SME sales, which is a more stable base of sales. And then there are the large IFM agreements. And the large IFM agreements, they're large and they come at a more stochastic way, so there's not the even flow of those over time. And when we look at the -- what's come to the market of large IFMs during last year, we've won our share or even more than our share of that. But it's been a year where fewer large IFMs came to the market, and that affects us in the year.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [10]

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So have you any reason to change your near-term outlook on that as well? Or is the pipeline as strong as always?

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Mikael Stöhr, Coor Service Management Holding AB - President, CEO & Director [11]

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No, the pipeline is strong. Moving into 2020, I'm very happy with the pipeline that we're seeing, both for the large IFMs and the stability in the SME sales. So we're moving into 2020 with high confidence from a new business perspective.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [12]

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And one last question from me. I guess some part of that weak portfolio development is unprofitable contracts in Finland, I would guess, that you're stepping away from. Normally, my way of looking at this business is that when the contract is terminated, it tends to be on a higher margin than the segment average. While now, I guess, this might not be the case. Can you comment on the net or average profitability in the lost portfolios or lost contract?

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

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No, it's a couple of points to that. As you can see, in the SEK 180 million that were then finalized as a volume that then left the portfolio, there are 10 contracts. There's nothing that is significantly of -- in itself, of a significant size. So a bunch of midsized contracts. You are right that a part of that is the moving out of very low profitable contracts in Finland. So I'd say, there's nothing that sticks out in any way, neither up nor down in -- from a margin perspective of the volumes that we've moved out of in the last part of the year.

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Operator [14]

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(Operator Instructions) Our next question comes from the line of Karl-Johan Bonnevier from DNB Markets.

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

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If I may continue on Henrik's line of question just to be certain on a couple of items. When you look at Denmark, with the second wave of the efficiency that you're now looking at, do you feel that Denmark is on target to get up to what you've would call the group average expectation on profit margins, the 5.5% level?

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

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KJ, yes, I do. There -- as I mentioned, there are a couple of moving parts in the quarter for Danish margins. It's both the need for a further internal efficiencies, and there is also the -- for Danish perspective, fairly substantial ramp-up that we're in, in the Danish Police contract. Now with time, if we just continue to do what we've done over the years, I think we should expect to see some positive effects on both those 2 items in 2020.

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

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When you look at the Elite Miljøvård acquisition that has now basically delivered what you hoped for when it comes to the -- your original assessment of what that group was going to contribute.

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

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Yes, it has. Yes, it has. And that the total of that integration is -- we closed that up in the beginning of 2019, so that is continuing to deliver. We're continuing to be very happy with that.

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

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And when you look at Finland, obviously, you were trying to do a drive into the FM segment in Finland to be able to build critical mass. It seems like a couple of those contracts apparently didn't deliver what you hoped for and now stepping back. Is there any risk that you're going to, say, miss your critical mass to have an operation in Finland and, say, that being a constant margin dilutor for you?

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

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I mean -- and you're right, I mean, part of -- we're seeing the decrease in volumes in Finland is a stepping out of contracts that have not worked out for us. And that's something that we will always prioritize, obviously, profits over volumes. Volumes without profit, it's really of no use to anyone. So I'm quite confident, though, that -- because we can see there are new contracts we've moved into in Finland that are profitable for us. And I continue to see opportunities in Finland. However, as before, the Finnish market is structurally different, so there are very few of the larger IFMs that come to market in Finland. So it will be, I believe, a -- continue to be a more of a single service game in Finland, which inherently is little bit more difficult for Coor given our spike in the large integrated. But structurally, in Finland, really no change, rather an application of the old Coor principle of putting profits before volumes is what you're seeing in Finland.

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

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And you still see a business case for Finland, say, in the 3- to 5-year perspective to get it up where it should be.

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

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Absolutely.

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

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Excellent. Then just on variable volumes, again, if you could. You normally give some guidance how you see those volumes having contributed to the margins in the quarter, if it's average or above or below contribution from them.

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Klas Elmberg, Coor Service Management Holding AB - CFO & IR Director [24]

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I think you can see them as average contribution this quarter, only one.

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

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And if you compare that with a year ago, I guess, at that time, it was slightly dilutive in comparison. Or...

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Klas Elmberg, Coor Service Management Holding AB - CFO & IR Director [26]

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Yes. I think we see that in Sweden, that it's now somewhat better.

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Operator [27]

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And as there are no further questions registered at the moment, I will hand the word back to speakers for final comments. Please go ahead.

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

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Thank you very much, and thank you again to all of you for listening in today. And I look forward, and we look forward to seeing some of you in the coming days. Thank you very much.

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Operator [29]

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And this now concludes today's webcast. Thank you all for attending. You may now disconnect your lines.