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Edited Transcript of CRA1V.HE earnings conference call or presentation 15-Aug-19 8:00am GMT

Half Year 2019 Cramo Oyj Earnings Presentation

Helsinki Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Cramo Oyj earnings conference call or presentation Thursday, August 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aku Rumpunen

Cramo Oyj - CFO

* Leif S. Gustafsson

Cramo Oyj - President & CEO

* Sohana Josefsson

Cramo Oyj - SVP of Marketing & Communications

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Conference Call Participants

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* Pauli Lohi

Nordea Markets, Research Division - Associate

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Presentation

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Leif S. Gustafsson, Cramo Oyj - President & CEO [1]

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Welcome to Cramo Group's H1 presentation. My name is Leif Gustafsson, I'm the group CEO. And with me today, I have Aku Rumpunen, the CFO of the group. We will divide the presentation accordingly.

Well, it has been definitely an interesting first half year, particularly in the second quarter, where I will put some more focus now. Worth mentioning still, I think, the value creation that we successfully did here in the end of the quarter by demerging our Modular Space division, Adapteo, and also by that listing it on Stockholm NASDAQ is very satisfying. And I think for Cramo, of course, a historical quarter as such, but also for our shareholder, I believe, a very good and interesting value creation into the future.

Of course, it's very important now to move forward. And I'm very satisfied that I can, with my management team, put all the efforts and focus into Equipment Rental business, which in itself is a very fine business with great possibilities for the future. Cramo Equipment Rental has a strong history of performance since many years back over business cycles, having a strong position in, especially in the Nordics and also in Central Europe. That is something we will continue developing now moving forward. It is an interesting company also now being fully focused on a fully fledged equipment rental service provider for investors. It is a more clearer business structure for us. We have a strong balance sheet, which we aim to use in the very best way to further grow and develop the company.

We generate strong cash flows, and we have, over a cycle, a very discretionary investment CapEx policy, which is very useful for a company to adjust accordingly how the situation looks. We see increased opportunities here and attention to generate even more cash in the future. As you know, being a group with 2 divisions, both has been quite -- CapEx -- have big CapEx needs, by now, be able to use this strong cash flow from Equipment Rental and put it into the equipment rental market. I think we can see a much stronger, competitive Cramo into the future. As I said, we have an interesting footprint in Europe. We see growth opportunities, both organic as well as inorganic. We have committed -- we have committed employees that is very determined to take Cramo into the next level. And from my point of view, this is the bone -- the backbone of a company if we want to go forward and deliver it -- deliver good performance into the future.

Coming into the figures for Q2, we ended up with a net sales of EUR 153.1 million. In brackets, you have the previous year's sales. If you look at reported currencies, it was slightly below 2% in difference; local currencies, 0.4 percentage; and organic sales growth, minus 0.4 percentage. We have to look at comparable EBITA, which ended up at EUR 15.3 million, EUR 22.4 million the previous year, ending up to 10% of sales; previous year, 14.3%. Gross CapEx for the period was EUR 30 million. In brackets, you have EUR 55.5 million the previous year, generating quite good cash flow, operative cash flow as we see. But maybe more interesting also, the investment also generating EUR 23.7 million in cash flow comparing to previous year of EUR 8.3 million.

In July here, we decided in Cramo to go out with a profit warning, meaning that we see that we will not reach the full year's EBITA compared to previous year. We thought that was vital and important to inform our shareholders based on quite a soft H1 from our side. What we are doing now in full speed is, of course, to rightsize Cramo after the demerger of Adapteo. We're looking into other areas where we can optimize the cost base because the target for us now to even -- to be even more competitive moving forward. As I said, we have a very strong balance sheet. We generate strong cash flow. We will use that also to be -- give more efforts into the market, more sales efforts, and we're definitely in here to win the game in the market. We see potential to take even market shares.

This is a program that will continue and continues now in full speed. We define it as short term, meaning during '19, where we aim to have a full run rate of cost savings between EUR 10 million to EUR 12 million, effect from 2020. Have estimate the restructuring cost to be roughly between EUR 3 million and EUR 5 million. That will be taken now during H2 in full effect. And gradually, in the end of 2019, we should see also here -- referring to Q4 onwards, we should see effects from this program that we are now running in full speed in the group.

Market is interesting and is vital for us, and it's a lot of thoughts and pre-action for the future. What we're trying to describe here is a little bit from euro construction, how they see the development now in '19 and '20. And as you can see here, what is peaking or -- which is a little bit extraordinary, is the market in -- especially in Norway and Eastern Europe. The prediction there is to be fairly good, also moving forward, which is good. On the other hand, we see that it's flattened out or leveling out even more in Sweden, Finland and even Germany now as a projection.

From our point of view, we see more or less the same scenarios. But as always, it's also how you position yourself in the market because it's still a market there. And I will come back when I talk about each segment here, how we see the future near time and also what we have in pipeline for the different countries.

Repeating what we just saw, sales ended up at EUR 153.1 million. If we look at that in local currencies, it was a slight decline. On the other hand, it was a bigger decline when it comes to profitability and profit compared to previous year's second quarter ended up at EUR 15.3 million compared to EUR 22.4 million. What is important in a declining top line, of course, is it has an effect on the profit and profitability. We also stated in our release earlier that a big drop in top line comes from Sweden. We had, last year, quite significant, big industrial project. I will touch on them again. But from a group level, it's important, anyway, looking into H1, that our gross margin is, in fact, compared to previous year, meaning not any brutal price decreases, in general, from a group point of view. We have managed to keep up and keep a steady gross margin in H1.

Going into the business segments then and starting with Scandinavia, Sweden and Norway. As we have stated and as you have seen, Norway is improving, is definitely capturing the potential that we see in the market, has done now for quite a long time compared to history, if we go back a couple of years. Sweden has had very, very good years now for several years of improving and giving a very strong result year-on-year several years in a row, so a decline in top line, which has a direct impact on profitability. And just to give you a flavor of that in last year H1, particularly during spring, we had some really big project, industrial project in Sweden, which has fading out and are not present anymore, which also directly has an impact. We have seen the run rate on [depot] level during spring here to be on more or less same level as previous year. So we're missing out the peaks from the industrial project.

Moving forward now, we, of course, all the time, try to improve and get the business to be even more efficient, and we are doing that in Sweden as well. It's no exception there. So now it's to be more competitive in the future, prepare if the market will be a bit softer. We should definitely adjust ourselves, so we can be sharp and competitive in the market, which is in full speed.

Talking about the market development, yes, residential, nonresidential is going to flat out or level out maybe even a bit more. We here mentioned that the industrial segment for us is positive, obviously a positive size. That goal may be against what the pre-actions are when we talk about the industry. There is more -- quite a negative unit. What I'm referring to is our order backlog. We have been quite successful in the industrial segment. And already since 2017 in autumn, when we're starting to see a decline in Stockholm, I already said that we will put quite a lot of focus, especially in the northern part of Sweden, in the industrial projects that we see. And that has been quite successful for us, and that has continued. So we have a fairly strong order backlog. We have projects that will be -- or in phase of starting up. They have been postponed, I will say, during spring here, but now they are starting up in a good level, no material impact maybe in '19, but it will definitely have a strong contribution in 2020. So from that point of view, when it comes to industrial project, we are fairly positive, and that's why we're also referring to industrial segment.

Finland and Eastern Europe. Well, it was a bit soft even here. Even if we can see small signs that we are improving a bit in Finland, our business, we have done significant transformation program in Finland, working more from a hub-spoke structure to create efficiency in the future. It takes some time before you have trimmed the organization and these routines are working and process accordingly. Especially in Finland now, we can see that they have a bit too high direct cost coming from the assembly part where we're missing out some of the vital process. It's not as sharp as it should be. We see transportation has increased a bit too much, its new routes, planning and so forth that is not in plan as it should be, but that will come. So I'm more and more seeing that we can be definitely a strong competitor in Finland also after more or less a year here in a quite weak development in Finland. We will support it definitely. We see still a market, even if it starts to decline here in Finland, but still market enough for us to be competitive. And that's what we're going to aim for now moving forward.

Central Europe, as you know, contains Czechoslovakia, Austria, Germany and Hungary, even if Hungary is very small. If we talk about Germany, as such, it has been a challenge for us for quite a long time as you know. We can see now year-on-year that if you take in consideration the extra transformation cost that we have here, that more or less come out on the same level as previous year. That is not good enough, far from good enough. So we expect more, and we are pushing even more now to take the right measurements to get Germany up to a decent level. A part of Germany, since a year back, more or less, is KBS Infra. They are growing very strongly. They're taking a lot of industrial projects and have quite a nice scenario in Germany now. But the contribution from the joint efforts, Cramo Equipment Rental, as previous, together with KBS, is not giving enough yet. And here, we put more focus now to try to capture that. The market, as we speak, decent definitely. Projection that it should leveling out a bit. I think the industry is still in Germany for us with KBS, as in the front, could be quite interesting still, at least during autumn and maybe a bit also into 2020. So more to do there to come up on a decent level is clear and full focus to try to reach that.

Then I leave the word to Aku Rumpunen.

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Aku Rumpunen, Cramo Oyj - CFO [2]

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Thank you, Leif. Okay. I will start with going through some summary, maybe a bit repetition also what Leif already opened up here, but I will start from the sales development, Q2 and the first half year. On the left here, we can see the second quarter performance, as mentioned, a slight decrease now from the reported numbers, 1.9%. But if we look at organic growth and in local currencies, it's basically flat against last year second quarter. In terms of first half year, then we have also positive impact from acquisitions, i.e., from the acquisition of KBS Infra that was consolidated from the March 2018 onwards, the figures, amounting to EUR 6.3 million, but that was now offset basically fully with the FX impact from mainly Sweden and then Norway. And the cumulative sales also relatively flat against last year.

Moving on to comparable EBITA then for the second quarter of the year against last year, as Leif mentioned, mainly impacted by the Swedish operations and especially the large industrial projects, timing of that one. Have to mention that also here in the Sweden side, we had 2 business days less and also some FX impact in total, amounting to EUR 0.7 million approximately on this drop here.

Cost base development. This is very important, and this is something that we follow on a monthly basis very closely. If we start from the left, we have the direct cost development, cumulative first half year and then the second quarter. And as we see here, gross margin and the direct cost ratio is exactly flat against last year, very good performance there. In the second quarter, a slight increase in the direct cost side and then also a slight decrease in the gross margin. In the indirect cost side, if you look at the absolute figures now, there, we have quite material impact from KBS Infra, approximately EUR 3 million, which is basically the gap that we are seeing here and also impacting on the quarter -- second quarter figures slightly. Depreciations increasing against last year. And there, we have impacts from different sites. We have, of course, different investment profiles last year in different markets but again referring to Germany and KBS Infra where we have supported the growth with the growth investments [that] impacting on the depreciations also. But part of that comes also from the -- so with right of use asset depreciations relating to IFRS 16. And comparable EPS development, EUR 0.20, exactly same as the first quarter of last year but below the second quarter of last year, where it amounted to EUR 0.33.

Then leverage and comparable return on equity. Firstly, talking about leverage here, we see quite a big jump now in the second quarter compared to first one. And that is exactly the same pattern that has followed now many years, and that mainly comes from the fact that a large share of investments and the timing of investments is in the second quarter of the year. And also dividend payout affects always on the second quarter figures as it did now this year. 2.15% was the net debt-to-EBITDA ratio now in the end of Q2. But there, I have to take up still unsettled internal debt movements between Adapteo and Cramo Plc that amount to EUR 30 million now in the end of Q2. And that will be settled now during the Q3, which means that also the net debt-to-EBITDA ratio comes down quite nicely, approximately to 2.01 level, which is also quite nicely below the last year level. And still, to remind that these are IFRS 16 figures, excluding that one, i.e., with old numbers, this would be about 1.7 ratio. Return on equity comparable, amounting now to 14% against 15.3% in the end of 2018. And then Leif already mentioned about the cash flow profile going forward. Here, we have the operative cash flow and also cash flow after investment showing quite good improvement against last year. And we see clearly lower investments now the first half of this year compared to last year, and that will continue still this year, meaning that our estimation is that the cash flow generation will be strong also going forward to this year.

That's all short recap of the numbers and then handing back to Leif for the conclusion and outlook.

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Leif S. Gustafsson, Cramo Oyj - President & CEO [3]

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Okay. Thank you, Aku. Well, I've touch on the market outlook. I think it's worth repeating it. The estimates from Forecon in '19 has decreased 1% in Sweden; on the other, growth in Norway. We are following this frequently, of course. And one thing is what the institute say and one thing how we see the major customers acting and planning. And we, of course, especially in Sweden now moving forward and for the future. We are planning and following it accordingly. But as I said also, we see potential, and as I said, quite a strong order backlog when it comes to interesting industrial projects that will contribute a bit more in the end of '19 but definitely for 2020. Finland, Eastern Europe remains more or less at '18 level definitely. Lithuania is strong, had a very strong year so far in the market. That will continue growing. And in Finland, here, now, the construction margin is expected to decrease, roughly 1.92%. And this more or less the same level in Lithuania. On the other hand, it's a growth in Lithuania in the construction part. Central Europe estimates to have a growth. The rental market, between 4% and 6%.. Construction margin growth estimate for '19 is fairly low, between 0.2% to 1.8%, in Germany and Austria, and a bit more rapid in other countries. We have seen, for example, in Czechoslovakia, for us, very good market. I think we have captured it very well. And I think we can see a bit of sign maybe flatten out a bit in Germany and moving forward. But still, as I always say about Germany, from our point of view, we have never seen any high peaks. On the other hand, it has been quite a stable market. So that is also a little bit how we're planning now.

Conclusion, I mentioned it. We are rightsizing the group cost structure from the demerger but also taking other measurements to secure competitiveness, I would say, in the future and by that, also, of course, profitability. We believe that we have quite a lot more to get out of our Cramo Equipment Rental machine. It's a well-run company in many perspective, I think, with the intake and secure a good position in the market by also being a bit more competitive and a bit more cost efficient than we are today, and that is in full focus. We set a target of EUR 10 million to EUR 12 million now, a new run rate from 2020. That amounts to lot of actions during autumn, and that is in full speed to accomplish that. We have finalized our new strategy that we are very eager and interesting to present on the 12th of September at our Capital Markets Day. Beside that, we will also, in more depth, describe group-wide performance program that I'm now mentioning from cost reduction and other measurements. So I'm really looking forward to that day, and I think it will be an interesting day for the auditors to hear a bit more about Cramo's way forward.

Thank you for that. I think we open up for Q&A, please.

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Questions and Answers

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Pauli Lohi, Nordea Markets, Research Division - Associate [1]

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Pauli Lohi from Nordea. You are having quite a low organic CapEx this year due to a declining market in Sweden and Finland, so your cash flow is pretty strong. So what kind of plans do you have for that higher cash flow? Do you think you may do some acquisitions during this year or next year?

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Leif S. Gustafsson, Cramo Oyj - President & CEO [2]

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Thank you. Well, it's a good question. Yes. Important for us still is, of course, growth. We always in Cramo try to balance to have as much as possible profitable, sound growth. And acquisition, yes. We see opportunities, as I said, in several countries. We'll continue focusing on that. The balance sheets give us some firepower for it, so we will definitely have that in focus. But also, yes, I mean, CapEx during autumn, in general, for investing in the market is lower, will be lower than last year. But still, we put some efforts now in autumn here to take some market share, to be really competitive and secure that we are visible in the market. So the answer to that is yes, M&A, important for growth factor but also organic growth in certain markets definitely.

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Pauli Lohi, Nordea Markets, Research Division - Associate [3]

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And would you like to reduce the leverage ratio further? Or do you think it's at suitable level?

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Leif S. Gustafsson, Cramo Oyj - President & CEO [4]

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I think -- maybe you can also add back in the [stock,] maybe I think it comes out on a decent level now based on -- I think we will open up more in Capital Markets Day around this because, there, we'll tell more also about the future, the growth ambition that we have. And that should be in relation to the new financial target now. So -- but as an outcome come now short term from the demerger, I think it's on an okay level.

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Aku Rumpunen, Cramo Oyj - CFO [5]

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Exactly. It's particularly my answer also. No reason to repeat it.

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Sohana Josefsson, Cramo Oyj - SVP of Marketing & Communications [6]

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Question, can you explain the cash flow effect of the Adapteo listing of Cramo? Does the EUR 386 million profit have a cash flow effect?

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Aku Rumpunen, Cramo Oyj - CFO [7]

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Yes. I can answer that one. No. That will not have any cash flow effect. That is technical accounting treatment of the demerger.

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Sohana Josefsson, Cramo Oyj - SVP of Marketing & Communications [8]

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From Ari Järvinen, Danske Bank. Do you consider positive earnings development in joint venture for trend to be sustainable and to continue in H2 which probably is seasonally stronger than H1?

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Aku Rumpunen, Cramo Oyj - CFO [9]

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Well, I can say that we expect continuous contribution from our joint venture, definitely during H2, so without going into specific figures. But yes, I expect contribution.

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Sohana Josefsson, Cramo Oyj - SVP of Marketing & Communications [10]

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Okay. And then for Ari Järvinen also. What is sustainable level of maintenance CapEx on an annual basis?

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Leif S. Gustafsson, Cramo Oyj - President & CEO [11]

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Well, if we look a bit back, we have roughly the same as our depreciation level. I would say EUR 90 million to EUR 100 million per year. Smaller part of that has been our Modular Space business. A bigger part has been, of course, Equipment Rental. It's always important for maintenance CapEx to keep the fleet in good shape and don't build up investment as such. New levels, I think we will present that more in Capital Markets Day, together with other financial targets, but it will continue to be in line with depreciation levels. That is our -- we haven't changed that. You want to add?

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Aku Rumpunen, Cramo Oyj - CFO [12]

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No. That's fine.

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Sohana Josefsson, Cramo Oyj - SVP of Marketing & Communications [13]

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Okay. Also from Anssi Kiviniemi. How large net effect should we expect from the cost-savings program in Q3 and in Q4 to comparable EBITA? Will all cost savings be visible in Q1 2020?

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Leif S. Gustafsson, Cramo Oyj - President & CEO [14]

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Well, yes. We haven't said or got into details regarding Q3 and Q4. What we say is it gradually will be visible in Q4. The aim now is to have a full effect from the beginning of 2020, meaning January. And the net impact there should be -- this cost saving should be full effect on EBITA moving forward during 2020.

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Sohana Josefsson, Cramo Oyj - SVP of Marketing & Communications [15]

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Okay. And then from Anssi Kiviniemi, too. In Q2, the sales declined in Sweden, minus 8% on local currencies. Should we expect similar development in H2 2019? Or should we see smaller decline due to calendar effect being neutral?

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Leif S. Gustafsson, Cramo Oyj - President & CEO [16]

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Well, we're starting to talk about guiding now, and we don't do that. So -- but I agree, as I said, the first half year was soft. I think we tried to explain the main reason behind it is Sweden. I just mentioned also that we have some new, interesting industrial project in our order backlog. The contribution from then will not be material during H2, some signs of it, definitely, but not any big or material impact. We're aiming, of course, to be aggressive in the market and try to have a decent top line now moving forward. So without guiding on it, we're aiming to have a stable autumn. That, I can say.

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Aku Rumpunen, Cramo Oyj - CFO [17]

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And maybe if I add a bit that if we look at last year now and talk about comparables now and change, also then the comparable periods effect on that one and the highest share of this industrial projects and contribution we saw in the first half of last year. And gradually, that started to decrease going forward to Q3 and Q4, which then, on the other hand, affect on the comparison figures going forward.

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Leif S. Gustafsson, Cramo Oyj - President & CEO [18]

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Yes.

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Sohana Josefsson, Cramo Oyj - SVP of Marketing & Communications [19]

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Okay. And then one question still from Anssi Kiviniemi. What should we expect 2019 and 2020 CapEx to be?

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Leif S. Gustafsson, Cramo Oyj - President & CEO [20]

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Well, 2020, I think we have to wait until the Capital Markets Day. It's a bit of a cliff-hanger. But in '19, what we can say, and that's clear already, you see it already in H1 here, that it will be significantly lower than last year. So quite a big decrease from previous year. That, we can expect.

Okay. No other questions. We thank you for your engagement and interest. Thank you very much.

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Aku Rumpunen, Cramo Oyj - CFO [21]

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Thank you.