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Edited Transcript of ELAN B.ST earnings conference call or presentation 16-Jul-19 7:00am GMT

Q2 2019 Elanders AB Earnings Call

Molnlycke Jul 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Elanders AB earnings conference call or presentation Tuesday, July 16, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andréas Wikner

Elanders AB (publ) - CFO

* Magnus Nilsson

Elanders AB (publ) - President, CEO & Director

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Conference Call Participants

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* Carl Ragnerstam

Nordea Markets, Research Division - Analyst

* Karl-Johan Bonnevier

DNB Markets, Research Division - Analyst

* Mattias Ehrenborg

ABG Sundal Collier Introduce - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Elanders AB quarterly results conference call.

At this time, I would like to turn the conference over to Magnus Nilsson, President and CEO of Elanders. Please go ahead, sir.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [2]

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Okay. Welcome, everyone, to Elanders' quarterly call. It's Magnus Nilsson speaking; and together with me is also Andréas Wikner, our CFO. I will start by going to #2 in the -- Page #2 in the presentation and talk about the numbers for the second quarter and the first 6 months. And I will make my comments based on excluding IFRS 16 to make it more easy to compare the numbers.

So if we start, look at the second quarter and net sales, the net sales for second quarter was SEK 2.72 billion compared to SEK 2.61 billion, 2018. Our EBITA results went up to SEK 122 million compared to SEK 116 million. And we also continued to have a rather strong operating cash flow, that was positive SEK 77 million compared to SEK 127 million the year before. And our return on capital employed improved to 8.3% compared to 7.3% the year before.

So if we then look at the accumulated numbers for the first 6 months, our sales is now at SEK 5.52 billion compared to SEK 5 billion, 2018. Our EBITA result is up to SEK 237 million compared to SEK 199 million. And if we look at accumulated operating cash flow, it's now positive of SEK 297 million compared to SEK 92 million the year before. And return on capital employed is at 8% compared to 6.4% the year before.

So then if I move to Page #3 to make some comments about the second quarter. The capital demand was very strong in April and May but decreased in June, and that was mainly due to vacation period in Germany that this year was in June, and that was in May last year.

We also have some effects about the Easter because last year, the Easter was in the end of March, but this year in mid-April. And this had a positive effect on sales in the first quarter and a negative effect on the sales in the second quarter in comparison to last year, as some of our Automotive clients closed down their production for a few extra days during Easter.

The activity continues to be very high regarding customers' request for quotes and information. We also, as we mentioned before, we have lots of existing business out for tender, and we managed to retain the majority of this existing business during the second quarter.

The organic growth was slightly positive, but close to 0 in Q2 2019. But the subscription boxes in the U.S. within Print & Packaging Solutions is continuing to drive organic growth. And organic growth year-to-date is now at 5%.

In 2018, Elanders started to implement the factoring program without recourse. The factoring program had no significant effect on the cash flow in the second quarter. We expect it to have a bigger impact in the third quarter.

So then if I go to Page #4 and talk about Elanders' different customer segments, and then I will mainly focus on the second quarter. And we -- if I then start with Automotive, we managed in the second quarter to grow our Automotive business with 5.7%. And also in Electronics, we had a growth of 5.4%, and we had a very strong growth in our area of Fashion & Lifestyle that went up with 19% in Q2. But in the Industrial segment, we had a decline of 10%. So overall, the customer segment was running pretty well in the second quarter.

If I then look a bit more about Automotive, we could see good growth in April and May, but then we had a downturn in June, but that was mainly due to the vacation period in Germany. We also -- some of our Electronics customers also had some problems with their supply chain and the supply of certain components, which had a slight negative effect on our sales. But that was compensated by that we have a growth in new customers in the area as we still could show growth in Electronics.

And if we look more at Fashion & Lifestyle, we could see a pretty strong growth in almost all our big customers in the period. But in Industrial, we had a decline in volumes, especially from one of our main customers in Germany.

If I then go to Page #4 (sic) [Page #5] and look more at the business area of Supply Chain Solutions. Supply Chain Solutions sales-wise was roughly in line in the second quarter with the year before with a sales of SEK 2.1 billion compared to SEK 2.08 billion the year before. Supply Chain Solutions continues to be our biggest area and the share of sales is now at 79%. It was the same in the first quarter.

If we then look at the result for the second quarter, our EBITA result went up to SEK 107 million compared to SEK 96 million. And if we look at accumulated numbers, we are now at the sales of SEK 4.36 billion compared to SEK 3.98 billion. And our EBITA result is up to SEK 205 million compared to SEK 155 million the year before.

As I mentioned before, the demand was strong in April-May, but it was more slow in June during the quarter. We have -- we got some new interesting business in the Supply Chain Solutions area in Q2, and that is from a customer who's selling -- in Fashion & Lifestyle, who's selling luxury goods. And we will now make a combined solution for them where we will have a big hub in Germany via LGI, our subsidiary, LGI; and then our other subsidiary, Mentor Media, will run their hub for Southeast Asia out of Shanghai. And this is a concept we think will -- can attract much more companies in the Fashion & Lifestyle area. That was an important breakthrough for us.

We also launched -- we made a successful launch of our extended Value Recovery Service for used IT equipment where we help our customers to maximize the value and minimize the environmental impact from their equipment during the entire life cycle. And we added a couple of new customers, and we now have a new platform up and running to handle this type of project. So that was Supply Chain Solutions.

And then if I go to Page 6 in Print & Packaging Solutions. Then we can see in Print & Packaging that the positive trend in Q1 continue in Q2 and we again could show an organic growth in the second quarter. And sales went up in the second quarter to SEK 605 million compared to SEK 544 million the year before. And we also managed to improve the results. The EBITA result went up to SEK 33 million compared to SEK 28 million.

And then if we look at the first half year, sales is now up to SEK 1.2 billion compared to SEK 1 billion the year before, and EBITA is up to SEK 66 million compared to SEK 54 million. And as I mentioned before, the organic growth comes out of the subscription boxes in the U.S. But even if we take that away, we could show an organic growth of 4% in Q2 in the Print & Packaging area.

And we can see that our concept with the combination of higher-output inkjet production in high-cost countries, combined with our low-cost production in Poland and Hungary, is still very attractive to our customers. And this is one of the reasons that we can drive an organic growth. But we can also see that, especially in Germany, that lots of our competitors has now went bankrupt, which has increased our volumes. So we can see we are gaining more market share. And the share of Print & Packaging Solutions is now 21% of total sales.

And then if we look at focus areas going forward, I think it's the same that we have talked about before. We are now focusing a lot on business with high added value, like sophisticated contract logistics and omni-channel solutions. I think the omni-channel solutions, a good example is this customer I talked about where we will do the -- take care of their merchandise and other luxury goods just both in Europe and in Asia. And also, value recovery and after-sales service is an area that we have high priority in. And this will over time help to improve margins and to increase return on capital employed.

And we also continue to focus more on margin and growth. And we try to be more selective when we acquire new business and prioritize margin before sales. It’s still very important for us to say no to low-margin business with low return on capital employed and to focus on high-margin business.

Okay. That was everything for me. And now we hand over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question. Please go ahead, caller.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [2]

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It's Carl Ragnerstam, Nordea. I have a couple of questions. First, regarding the Automotive market, you said that in the beginning of the quarter, it was solid, but declined in June. How much of the decline was related to holidays and how much was related to weakening demand situation? And could you perhaps also quantify the holiday effects in the quarter?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [3]

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I think for us in -- as we see it, it's mainly a holiday effect because in June, there was a big holiday in Germany and lots of the companies almost goes down for 2 weeks, and that was longer time than we expected. But in the same time, the demand was strong in April and May. So I think I don't know how to quantify it, Andréas. I think maybe the sales was down for Automotive with 10% in June compared the year before, but then it was the same amount stronger in April and May. So it's really hard for us to see it was connected to the holiday or to the demand because, in our numbers, we still had a growth.

And if we look at our main Automotive customer, Daimler, their sales went down with 4.6% -- went down with 4.6% the first half year, but we are still up in Daimler as well. And in -- if we look at Porsche, we can see no decline, there's even a growth. And Audi was slightly down. So -- but for us, it's still a balance. It's still a positive growth for us. And the signal from our Automotive clients is that in July and August, it should be business as usual. So volume-wise, we don't see any warnings yet.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [4]

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Okay. Because when, I mean, Daimler communicated preliminary results and they talked about weaker car markets, slower product ramp-up, I mean how will that affect you? And can you perhaps offset that by your R&D contracts?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [5]

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Yes. For the moment, it looks like we can offset it because if you look at our sales is Daimler, like I said, 4.5%. And Porsche is not down, it's slightly up. The other Automotive customers is also down. But for the moment, we can offset it with doing more services for them. And we actually also have a lot of strong growth in the prints for the Automotive clients. That also gives a positive effect for us because our main competitor went bankrupt in Germany. And so today, we are almost the single producer for lots of the German car brands. So I think for the moment, we can compensate with doing more service for them and also some growth from Porsche as well.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [6]

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Okay. So you are not worried for H2?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [7]

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But we have tried to predict it before, but it's a bit hard for us. We think if the car manufacturers goes down with 5%, it will affect us with maybe the half. But for the moment, it's 0 negative effect for us.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [8]

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I have a couple more, if I may. Can you also give some flavor on the electronic market situation? You talked a bit about Asia being weak. I guess how is that outlook for H2?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [9]

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Yes. I think also Electronics is a bit interesting to look at because if we look at our main clients, HP and Dell in -- both HP companies and Dell in Electronics, we could see in the latest report for the worldwide PC sales that in Q2, HP Inc. went up with 2.6% and Dell with 2.1%. So -- and the whole market also went up with 1.5%. It looks like the underlying PC market is very stable for the moment. So what we could see was, in June, that for PC deliveries, at least where we are responsible in Europe and some parts of Southeast Asia, the volumes went down. But our customers say there's a -- they cannot find -- there's not enough of CPUs and it's the same comments from companies that's following the demand.

So there was a downtrend in Electronics, but in the same time, we acquired some -- 2 new big projects in Asia this year. And last year, we also acquired a big customer, Panasonic, in Germany. So that was offsetting the negative impact from some of our products we are serving. So we think it will be pretty stable going forward because the statistics shows that they are growing our customers, so it should not affect us so much. But June was a bit slow in both areas.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [10]

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Yes. And probably a final one for me. We have earlier talked about that you see Value Recovery Services as an interesting growth area going forward. Do you plan to grow organically or via acquisitions in order to get a strong footprint?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [11]

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The plan for us now is to grow organically because we have been doing this business for a while in Germany and Singapore, but now we have developed a platform that makes it possible for us to do this business global. So our idea now is to go to existing big global customers but also new ones and offer them a global solution for value recovery. And we think we have a very attractive offer. And during the second quarter, we acquired 2 new big companies where we will start in Germany as the first step and then the idea is to grow out.

So it's mainly organically because our competitors are mainly small local players, and we can use our existing infrastructure to do the describing and this thing, that we can do in our existing logistics hubs. So we are -- that's why we are putting lots of efforts in the IT software to handle the pricing for the equipment, handle certificates, handle the production and the deliveries and logistics. So that target for us is organic growth.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [12]

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Okay. Perfect. Sorry, I have one more. You also mentioned that you won most over the business that were up for tender. Can you say something about the pricing discussions? I mean do you usually need to lower prices when renegotiating contracts? Or how does it work?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [13]

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Yes. That's always -- there's always discussions. But I think, normally, we can keep up the prices and also add some margin because this is mainly in the supply chain, and they understand that we have increasing salary costs and other costs. So normally, we can do an increase in pricing. And for us, most especially, we have one huge hub in Germany that was up for tender that we now have secured. That was very important for us. And price-wise, it looks pretty okay. And we also have some more flexibility in our setup. We are changing the setup. So overall, I think the tenders we have now acquired, it looks good going forward. And we also have some...

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [14]

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And is that on a [midyear] basis? Sorry.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [15]

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Yes, that was full year basis. And we also have some huge tenders in the network solution transportation where we managed to increase prices starting the second half of the year. So that's also pretty good.

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Operator [16]

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No further questions in the phone queue at this time. (Operator Instructions) We will now take our next question. Please go ahead, caller.

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

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Karl-Johan Bonnevier from DNB Markets. Just if you could give me a short update on how the disposals or the joint ventures with LOGworks, Adecco and Edelman has impacted on the numbers and how they have progressed operationally.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [18]

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We have a small -- we have not so much effect on the numbers from this -- from joint venture actually. It's -- I think for us, it was good to make the joint venture because we could see there was decreasing demand, at least the first half year, because of the new regulations in Germany. But we think we, together with Adecco, will improve step by step, but there's no major impact on our numbers. So I think it was pretty neutral the first 6 months. But we hope, together with Adecco, that the business would be -- we can improve it going forward. And it's still very important for us to be able to use temporary employees. That's a big part of our flexibility.

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

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But no major impact, basically?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [20]

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No.

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

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And I guess is it just the slow ending of June that made, say, factoring being less of a business driver in Q2 for you?

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Andréas Wikner, Elanders AB (publ) - CFO [22]

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No. I think the factoring was more delayed by technical issues. Actually, it wasn't done by us. There's much more technical things about something you have to count. And yes, the 6 different ERP systems that we are -- need to feed our customer wins and that we need to separate the invoices for each customer because some customers are in the factoring program. So it's made it a little bit more -- a little bit tricky. So it's about getting the technical resources to make the adjustments to the ERP system that's taking time.

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

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But do you think you can release during the second half?

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Andréas Wikner, Elanders AB (publ) - CFO [24]

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I mean the aim and the forecast we see from our colleagues is that they should be able to use EUR 40 million. And currently, we are using EUR 12 million for the moment. So -- and that -- the EUR 40 million is sort of the average value that they will be using. Then we, of course, will have swings in the costs over the year. But -- so we want to push -- I mean, we are pushing them to get it to go because it sort of helps, but also the financing costs because the, yes, the rate of was cheaper, a lot lower than our existing ones for the other credit facilities, so that's why we are pushing it for next quarter.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [25]

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So if everything goes by plan, we should add at least SEK 250 million roughly in factoring, yes, during the second half.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [26]

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Excellent. And just one final thing. You mentioned also in the Industrial segment that you saw a, say, decline in volumes in Germany. Would you think that's also related to this holiday effect? Or is there any more, let's say, recurring item happening there?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [27]

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I think it was also noteworthy, but also there is a negative trend because also in Q1, they went down. And I think especially a bit surprising for us is that the big volume in the thermal technology was going down. So not so much connected to Automotive, but more for -- to construction. I wouldn't call it, yes, construction because of heat systems and things like that. So we don't know yet if our customers is losing market share or if the construction market is cooling down in Germany. There was some effect.

And we also could see some delays from some other Industrial clients. So it's uncertainty for us there. Normally, our customers is also private company, so they are not so transparent. The only information we get is what they give to the market as well. So it's -- we don't know yet.

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Karl-Johan Bonnevier, DNB Markets, Research Division - Analyst [28]

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But if I understand your general comment is that you see it stable, growing from a solid base. Basically, if you take the whole mix that you are exposed to, then obviously it swings or swinging back and forth in the micro sense.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [29]

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Yes. I think we have a very stable platform now because our Automotive is around 25%. At the moment we can keep up even if they are going down. And then in Electronics, like we said, we also acquired new clients. So there we have a growing demand. And Fashion & Lifestyle for the moment goes really strong for us. It's -- that's a really strong growth, and we have lots of new projects we're looking at. So it's almost up. I think it's up 19% compared to last year. So we think we can balance with our portfolio there.

And it's also like that, for some of the Industrial clients, we actually want to get out as well because some of it, it's very low-margin business. So some parts of the decline is actually also us pushing out by increasing prices to lose the business if we cannot do good enough money on it.

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Operator [30]

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We will now take our next question.

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Mattias Ehrenborg, ABG Sundal Collier Introduce - Research Analyst [31]

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Magnus and Andréas, this is Mattias from ABG. Well, I just have one question since the previous questions answered the other ones I had. But you state that you have gained some new businesses and that there's high activity responding to new quotation requests from both new and existing customers. I was wondering how these new contracts differ from your own -- from your current contract base regarding profitability and volume.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [32]

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I think from one of the big ones that we talked about in Germany, the good thing with the new agreement there is that we manage both to adjust pricing. But also in the deal with the customer, we will get additional volumes, so we will have a better business of scale there. We have a huge hub there, it's around 60,000 square meters, and now we will even expand it. So that is also a way for us to increase earnings to push our customers to give out more volumes. And we would now be the only supply chain provider in that -- in Europe for that part of the business. So that was important for us.

And I think the other 2 big business that we gained, especially in Asia, was really good margins and a really nice business. So that was big. And also, in the Fashion & Lifestyle, we have secured some new business with high profit. So -- and we are much more tough there with our subsidiaries now. And we also -- there was also actually some bigger business that we let go because we thought the margin was too low. So that is the focus we are doing now. So every time there is an RFQ now, we have a strong demand that we need to improve margin. And otherwise, we should be open to let it go. So that is how we are working with it now.

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Mattias Ehrenborg, ABG Sundal Collier Introduce - Research Analyst [33]

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Okay. And also, I was wondering regarding June, you said that the growth was dampened in June. Does this change your internal growth outlook for the full year? Or how do you see this quarter affecting your full year numbers?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [34]

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We are still at 5% organic growth. I think we had had some strong growth last year and the year before. And we will -- first of all, our focus on margin will remain to be around 5% organic growth, and we are still at 5%. And normally, third and fourth quarter are pretty strong for us in the sales. So we still believe, I think, Andréas, we will be there around...

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Andréas Wikner, Elanders AB (publ) - CFO [35]

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Yes, I think so. Especially since, I mean, our major customers are sort of -- they will be business as usual after the vacation holiday now. So there's no indication so far from our customers. I mean, of course, we are very, very dependent on their volumes and how they perform, so yes.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [36]

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And it's mainly only in Sweden that July is the big holiday period. Normally, in Germany and Asia, everyone is working 100% in July and August. So there are some holidays in August as well, but we still believe that we would be around there. If we don't -- if there is not any business that we don't like that we get rid of, maybe it will have some effects, but we should be around 5%.

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Mattias Ehrenborg, ABG Sundal Collier Introduce - Research Analyst [37]

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Okay. Perfect. And also, your margin, the target for the full year is also -- it also remains intact, do you think? Or...

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [38]

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I think the margins, it's -- we think we're on the right way, but it takes some time and we have some tough discussions with some customers with some projects. It's also the trends that they are ending. So we can see some positive trends in the margin in some areas. And in some areas, it's been more slightly negative because of the demand, especially in the Industrial, that has gone down with 10%. Then you get too close to a breakeven, so that has some effect. So -- but we still think we can improve margins step by step. So yes, that's the target.

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Operator [39]

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Thank you. There are no further questions in the phone queue. At this time, I would like to hand the call back over to you, Mr. Nilsson, for any additional or closing remarks.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [40]

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Okay. So thank you, everyone, for calling into our conference, and I wish everyone a nice summer. Thank you very much. Bye-bye.

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Operator [41]

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This will conclude today's conference. Thank you all for your participation. You may now disconnect.