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Edited Transcript of ETT1V.HE earnings conference call or presentation 5-May-20 11:30am GMT

Q1 2020 Etteplan Oyj Earnings Call

Hollola May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Etteplan Oyj earnings conference call or presentation Tuesday, May 5, 2020 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Juha Näkki

Etteplan Oyj - President, CEO & Chairman of the Management Group

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Conference Call Participants

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* Joni Sandvall

Nordea Markets, Research Division - Analyst

* Juha Kinnunen

Inderes Oy - Senior Analyst & Strategist

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Presentation

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Operator [1]

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Welcome to this webcast presentation of Etteplan's Q1 results for 2020. My name is Juha Näkki. I'm the President and CEO. And at the end of this presentation, there will be a Q&A session where you can post questions to myself or also our CFO, Par-Anders Gådin, who is joining online. First, to look at the topics of the presentation today. First, we will look at the highlights in Q1 and the start of the year followed by the financial development in Q1, slightly more in detail. We will take a look at how we are proceeding against our targets. And at the end of the presentation, of course, the Q&A session, as mentioned earlier.

But if I would like to start with the highlights. So basically, we had a fairly good start for the year in spite of the unusual circumstances that we were seeing. Our revenue was growing by 9.5% with comparable currencies. This was, of course, boosted by acquisitions that we completed last year, but still a relatively good growth. Our operating profit, EBITDA level was good in all our service areas. And especially, we were pleased with the technical documentation service area, where we were able to return to healthy profitability levels and exceeded our target of 10% for the quarter 1 this year.

On the negative side, the COVID-19 pandemic in China affected our results already in this quarter, where we had almost a standstill of the operations after the Chinese New Year, and February was, in particular, very, very difficult. But then we did see a quite rapid increase in demand in March. And moving forward, we see that China will be relatively okay.

But then also on the negative side, as the uncertainty in Europe was growing related to the COVID pandemic throughout the quarter, it started to really have an impact on our demand and our situation overall at the end of March. And the demand situation turned significantly worse. So now we are continuing the year in very exceptional circumstances.

If we look at the development of the operating environment, so in this quarter, the start of the year was slow in Finland, maybe due to the turbulence in the labor market. And in Europe, slightly slower project starts. But overall, the demand situation was picking up during the quarter and during the quarter -- towards the end of the quarter, the demand situation was quite good. But of course, the COVID pandemic had an impact and in China already in February and then onwards and then in Europe now later in the quarter. Still, if we look at the overall business, so still, our customers are directing their investments towards digitalization and related services. Outsourcing trend is continuing, competition for employees and limited availability of experts in certain areas is continuing or has continued in the first quarter. And we feel that when this pandemic is over or at least the burden for the business starts to be smaller. So we feel that these trends will still continue, and this will be the nature of the business going forward as well.

If we look at the development of the market in different countries where we operate. So as mentioned earlier, Finland had a slow start for the demand. This was mainly related to the turbulence we experienced in the labor market, the threat of strikes was imminent in the market. But luckily, those were avoided. And then the demand picked up in late January or early February, and the market was fairly good before the COVID pandemic effects started to show.

In the rest of Europe, Sweden, Germany, Netherlands, Poland, we saw some -- after slightly slower end for last year, we saw a slightly slower start for the year. But again, in January, the demand situation was picking up in February, and things looked pretty okay, but then the uncertainty of COVID was all the time increasing. And then towards the end of the quarter, of course, the market was heavily impacted in the rest of the countries. And in China, of course, the COVID pandemic had the major impact already in Q1. So after the Chinese New Year, our employees did not return from their vacation to a large extent. Most of them continued the vacation for at least 1 week, and then there were other restrictive measures, and people were not allowed to travel across different cities. And the return to the offices and return to work from the Chinese New Year vacation was relatively slow. There was a 2-week quarantine period in China for all the people that were traveling from one city to another, which had an impact clearly on our business. So February was really, really slow, and it had a hard impact on our figures as well.

Nevertheless, in March, we were gradually able to get our employees back to work. And as we saw that the -- at least the trade war was not having that big of an impact at this time so then the business started to recover fairly rapidly in China in March. And already at the end of March, beginning of April, our business situation was relatively normal. And we had quite good inquiries also, very large ones, which we did not see throughout last year. But of course, uncertainty, how long this situation will last is, of course, there depending on how the -- globally the economy will develop.

If we look at the revenue split then per service area. So Engineering Solutions was 58%; Software and Embedded Solutions, 24%; and Technical Documentation Solutions, 18% of our revenue. Revenue by country was Finland, 63%; Sweden, 23%; China, 2%; and Central Europe, 12%. And then the personnel by country. At the end of the period, Finland, 60%; Sweden, 19%; China, 10%; and Central Europe, 11%. So clearly, we are growing slightly faster outside Finland due to the acquisitions that we completed last year.

If we look at the revenue split by customer segment. So forest, pulp and paper was the largest one at 14%; industrial machinery and components, 12%; energy and power transmission, 12%; and mining, 10%, a slight drop in this quarter. But overall, the demand situation has not changed that much in these segments. Where we saw clearly weaker demand already in this quarter was -- or starting to show was the automotive industry and the metal industry, where the demand was also dropping. And here, of course, the others is way too far. We are working on that, but it's too big, but this is due to the acquisitions that we have completed, and we don't have these acquired companies in our systems in full yet. So this is something that we will improve on going forward.

If we look at the key figures, so revenue was growing by 8.6% in absolute terms. Operating profit EBITDA was improving by 2.4%, but due to the higher amortization of our intangible assets related to acquisitions, the operating profit EBIT declined by 2%. Earnings per share were EUR 0.17 as per last year and personnel at the end of the period, 3,402.

And regarding the outlook, of course, the COVID-19 pandemic has had a significant impact on the global economy. And the demand situation for our customers, and therefore, it also has a major impact on our business. Currently, it is extremely difficult to estimate what kind of an impact it will overall have for this year. And for that reason, we have withdrawn our financial guidance on March 30, which was announced to the market. And this is due to the fact that right now, it's completely impossible to estimate how the situation will develop in the coming months. If the pandemic is prolonged here in Europe and the restrictive measures seen by different governments are prolonged, then, of course, it will have a bigger impact on the business. So this is the case. We follow the situation carefully, and we will try to provide the market with an estimate as soon as it is realistically possible. But currently, it is impossible to give any kind of a meaningful estimate of our performance for this year.

If we look at the impact on operations from the COVID-19 pandemic. So we did react quickly to the changing operating environment and to the rules and regulations issued by these different governments. And already in March, so we were relatively fast in changing the operating model from the offices to work from homes or other remote locations. And currently and very fast after the measures were started, 85% of our employees are working remotely.

We have made quite a lot of investments into our IT systems and tools and due to the fact that we need these investments to actually execute our strategy, which is very much based on selling solutions to our customers and then delivering them from wherever they are best delivered. And due to these investments, we were fast in reacting, and we didn't lose almost any invoicing or any efficiency in this transition, and I really want to thank our employees for this kind of effort. It was a significant change for us, but we managed it very, very well.

However, the market demand was declining, and therefore, we have also had to do different kind of restructuring measures. And currently, we have temporary layoffs in place in Finland and in Sweden and in Germany. And at the end of March, we had 46 employees that were temporarily laid off. And at the end of April, we had 286 employees that had -- or were temporarily laid off. This number includes all the part-time layoffs. So some people maybe or some employees maybe temporary laid off for 1 day or have 2 days layoff or something like this. If we convert that 286 into an FTE, full-time equivalent number, so then that's around 180 for end of April. And unfortunately, we do see that this number may grow. How much? It's very, very difficult to estimate. But on the positive note, we have also seen that some of the customers have actually started to take back some employees, while others are still having a struggle. So it's hard to tell how the situation will develop, but we do anticipate it to get slightly worse going forward.

Also, this puts a burden on our finances, of course, but what we have now prepared ourselves, and we have secured loans and financing for our business. And currently, under any kind of circumstances, we will be able to survive this crisis, and we will be able to come out as a stronger company going forward.

Also, we are now, I said earlier, related to our strategy. We have stopped, to a certain extent, the strategy execution measures and different kind of development projects due to the financial situation and the fact that we do need to focus on the operative business to secure maximum efficiency and profitability. But we are continuing our planning, and we are continuing to evaluate what kind of measures we need to do to be able to succeed, to reach our goals going forward. And once the situation allows us to move forward, we will continue investing into our strategy execution. And we are confident that our strategy, which we updated last year, will carry us to success also after the pandemic.

And by doing this, we do feel that we will come out of this crisis. We will survive, and we will come out of the crisis as a stronger company.

If we then move into the financial development a little bit more in detail. So on the revenue side, the revenue growth was 8.6%, and with comparable currencies, 9.5%. Of course, the revenue growth was boosted by the acquisitions made in 2019. Organic growth, however, turned negative, and this is mainly due to the pandemic taking an impact on China. And also our offshoring business that we had done from China. And this is the main reason why the organic growth was negative. But also, we slowed down our recruitment of new employees due to the fact that the uncertainty related to the pandemic was increasing throughout the quarter. So we did not see any point in accelerating the recruitment further. Also, the revenue from key accounts decreased by 0.9%.

If we look at the operating profit EBITDA, it was at 9.2% of our revenue, which I consider a good achievement from our organization in this kind of prevailing market conditions. Of course, the COVID pandemic in China mainly took the EBITDA percentage down as we were loss-making in some of the months in China.

Operating profit EBIT was at 7.9% or EUR 5.7 million. And the amortizations related to acquisitions were increasing. So EUR 0.9 million now for this quarter.

If we then take a look a little bit more in detail on the different service areas. So Engineering Solutions was growing very well, 16.1%. Of course, this was mainly due to the acquisitions that we completed during last year, E&P in Germany and then Devex Mekatronik in Sweden.

The operational efficiency in the service area was good. The COVID pandemic did not have a major impact on the service area in Europe yet. But of course, in China, it was hitting this service area pretty, pretty bad. And overall, the performance was solid. But now going forward, of course, the demand is changing quite rapidly.

In the Software and Embedded Solutions side, we also had fairly good operational efficiency. The business was declining by 2%, and this is mainly due to the fact that we had slightly less employees in this quarter. Some of our customers were recruiting. One, in particular, was recruiting quite heavily our people, in-sourcing some of the business. And this had an impact on the number of people, and thus, the revenue. Also, the COVID-19 had an impact, and we did some restructuring. And overall, we also had some credit loss reservations in this service area, which also had a negative impact on the EBIDTA.

Restructuring of this unit mainly relates to the acquisition of Devex, where last year, when we acquired Devex, we did not have the exactly correct data on how much or how many people. We did not have the possibility to divide the business accurately. So we put certain offices into this service area and other offices into the other service area being Engineering Solutions. And now when Devex Mekatronik has been integrated in full and hit the plan, so then we have an accurate measure of the personnel and the people. And now approximately 20 people were moved from the end of last year from this service area to Engineering Solutions service area, which may look a little bit strange in our numbers, but this is the reality of things.

Operating profit was decent, and we expect that this service area will be surviving the COVID pandemic in the best way since we feel that customers will still continue investing into digitalization. The whole situation may even accelerate the pace of digitalization in different industries. And therefore, we anticipate that in this service area, we will be able to survive the best over this situation.

If we look at the highlight then the Technical Documentation Solutions. So last year, we have had some slightly weaker quarters. And now when we have done measures in Germany to recover our business. And we have also now been able to end the large project that burdened our business in the previous quarters, we have now been able to return to a healthy profitability level in this service area. The operational efficiency was really good. Some impact of COVID-19 pandemic in China had an impact on this service area as well. And our sales of our HyperSTE SaaS software was quite low in this quarter, especially compared to last year when we had some license sales. But this is mainly due to the fact that when we are selling the SaaS version, our customers are -- they require certain kind of checks and tests for us to be able to deliver the SaaS model. And this is taking time, and it also requires physical meetings to get these deals done. And in this prevailing market conditions, that is pretty much impossible. But there has been very good development in our pipeline, and there has been a significant interest to our software. So we are confident that once the pandemic is easing off, we will be able to start really selling the software and then see results out of our efforts.

But we are very pleased that now we exceeded the 10% margin again in this service area, and that is where it should be going forward as well.

If we look at the earnings per share, EUR 0.17 as last year and fairly decent development for the first quarter, but of course, going forward, difficult to tell how this will develop. And cash flow was considerably weaker than last year, and this is mainly due to the fact that we had a slower end of last year, especially in Finland with a strike of 3 days, plus the uncertainty related to it, plus all the indirect effects of the strike. They are now visible in our cash flow for the first quarter, and that is unfortunate. But we see that now from the first quarter, we have produced decent operating profit. So the cash flow should normalize to -- closer to our EBITDA levels again going forward.

Return on capital employed was at 18.4%. And personnel, as mentioned earlier, 3,402 at the end of the period. There was a slight decrease due to some of our customers recruiting some of our employees and also the number of employees decreased compared to the end of the year due to the fact that we slowed down our recruitment efforts in this quarter due to the uncertainty of the pandemic. But still quite okay situation. And at the end of the review period, we had 1,354 employees outside Finland. So a considerable increase there due to the acquisitions that we completed during last year.

On the income statement, nothing major that has not been mentioned before. The balance sheet, no major changes there either, goodwill slightly changing due to the fact that the Swedish krona is getting weaker, but no major changes in the balance sheet either compared to the end of the year situation.

And if we then look at our targets, how we are doing against our targets. So the revenue of EUR 500 million is still, of course, there. Our rolling 12 months revenue is currently at EUR 269 million, so quite far way to go. And of course, now with the pandemic hitting the market, it will be increasingly difficult to reach the targets, but we are still looking for opportunities for growth, and once the market starts to change for the better, we are willing and ready to move forward again to get to our targeted level by '24.

Revenue outside Finland is at 37% currently and has been now growing due to the acquisitions completed last year. Managed Services share of revenue was now at 59%. And currently, of course, we are trying, of course, to sell our solutions. But right now, any kind of sales that we are able to achieve, we will complete because it's -- the market situation is what it is.

And on operating profit, EBITDA, we were at 9.2% for the first quarter, but of course, now with the temporary layoffs and the declining business climate, there is pressure on the margins going forward.

And that's the end of the presentation so far. So now it will be time for questions-and-answers session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Joni Sandvall of Nordea.

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Joni Sandvall, Nordea Markets, Research Division - Analyst [2]

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A couple of questions. First, I would like to start with how is actually our backlog looking at the moment? I'm guessing that you are now delivering like old orders and demand has weakened. So I'm just thinking how healthy level is the backlog at the moment?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [3]

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Well, the backlog is -- we have certain projects that will run for half a year, certain projects that will run through 1 year and so on. So there is certain backlog. But of course, it is getting shorter. And then the new assignments given by our customers are shorter as well. But there are still some customers and some industries that are continuing to invest. And we are also winning new deals at the moment. So yes, it's hard to tell. But of course, it's clear that our customers' order backlogs and order books are decreasing. And that may have an impact on the demand as well.

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Joni Sandvall, Nordea Markets, Research Division - Analyst [4]

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Okay. Then the second question relates to layoffs. Could you elaborate how is the split between the countries currently?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [5]

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Yes. It is -- roughly, it was 100 in Sweden and something around 10 in Germany or slightly less. And then the rest in Finland. So in Sweden, they passed a new law, which made it possible to have these temporary layoffs. And there, we saw certain very harsh measures by certain customers. And there the number increased actually earlier than in Finland, but then now in Finland, the market has also declined. And in Finland, the customers have reacted. So now the number is slightly higher in Finland than in Sweden.

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Joni Sandvall, Nordea Markets, Research Division - Analyst [6]

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Okay. Then a question relating to new loan agreement. Could you give some numbers for us, how large is this deal -- new deal?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [7]

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And nor will I tell you the number here, but what I can say is that we have made agreements with our banks that we will secure the financing for this year. And of course, with the backing of our main owner, we are secure for running the business forward.

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Joni Sandvall, Nordea Markets, Research Division - Analyst [8]

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Okay. And last question regarding credit losses. How likely you see this when going forward? I think it's anyway getting now worst in Q2, Q3. So any major credit losses that may appear?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [9]

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Yes. I would say that the major part of our business is with large international corporations, and therefore, we don't foresee very large credit losses going forward. But then we do have also these kind of smaller companies, startup companies, where we may see problems. We have now made a reservation of approximately 130,000 on our Software and Embedded Solutions service area, which had an impact on the Q1 result. So we anticipate that there might be some more. We have now made a reservation. They are not actual losses yet. But of course, if these difficult market conditions continue, we may see some going forward. But I would not anticipate that to have a very large impact on our business due to the clientele that we have.

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Operator [10]

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Our next question comes from the line of Juha Kinnunen of Inderes.

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Juha Kinnunen, Inderes Oy - Senior Analyst & Strategist [11]

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This is Juha from Inderes. I was just trying to get a better picture about the current demand. So could you comment on the current level of demand and activity compared to the similar level a year ago or to the beginning of the year or whatever you've seen best?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [12]

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Well, I think that if we compare it to the beginning of the year or, let's say, to the first quarter, in general, so clearly, the demand has gone weaker. So we do see that our customers are taking measures to adapt their business into the prevailing market conditions. And as I said earlier, if our customers are not able to travel, that will restrict, to a certain extent, a new business and new deals going forward. So I would say that we are now in a market situation, which is clearly worse than it was during Q1, which is also visible in the number of temporary layoffs. And I would say that it will get slightly worse going forward in Q2. But then again, we are also seeing some customers getting some people back from temporary layoffs already now. And especially R&D companies seem to be continuing their investments. The ones that have the money in their balance sheet want to be stronger when they come out of this crisis with better products for their markets, and therefore, we see that R&D may continue and might not be that much affected, but in other areas, of course, if the order books of the customers grow down, this kind of order to delivery engineering will be on a lower level. But there are still some customers that have a fairly good situation and where the demand is still quite okay, and then there are others that are hit relatively bad. But overall, I would say that we are slightly, or clearly, weaker level already now, which is visible in our temporary layoffs. And going forward in Q2, it will get slightly worse. But then it's really tough to say where it will develop from there.

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Juha Kinnunen, Inderes Oy - Senior Analyst & Strategist [13]

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All right. Just if you could elaborate a little bit about your client segments. I guess you said that automotive was the only one where you see it has already seen a significant decline in the first quarter. Could you elaborate, have you seen something similar in other sectors now that we are 1 month after that?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [14]

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Well, I would say that the situation is difficult for pretty much all the sectors. Companies are having different types of challenges under the prevailing market conditions. But there are certain industries, for example, paper and board, especially, I mean, there is more and more cardboard used for the current way of trading and so on and so. So there, we don't see that bad impact yet. It's also -- there are longer projects and the deliveries are longer. So the type of industries where you have long delivery times for projects. So there, we have not seen that big of an impact yet. And of course, the investments are not made for the near future, they are long-term investments. So perhaps in these industries, the situation might be slightly better. But then the ones who have a very fast impact on their own sales, on consumer products or other things like that, there we see a faster decline in the market.

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Juha Kinnunen, Inderes Oy - Senior Analyst & Strategist [15]

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All right. Final question from me. How about the pricing in your market? Have you seen significant pressure downwards and perhaps even some market disruptions or something like that?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [16]

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Well, of course, there is pressure. And since there is less work. So there is a pressure for the pricing. There will also be certain companies in our industry, which are then suffering bad, and they will try to sell at any prices to be able to get some work done. So this, of course, has an impact on new projects and so on. But I think that we have the means with our operations in near-shoring operations in Poland and the offshoring operations in China. I think we have the means to cope with this kind of price pressure even in the short term. And I think we will be able to manage that one.

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Operator [17]

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(Operator Instructions) And there are no further questions at this time. Please go ahead, speakers.

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [18]

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Okay. Thank you very much. So as I said, right now, we are continuing in a highly unusual situation and highly unusual circumstances. And unfortunately, for that reason, we do see that we will not be able to grow as fast as we would have wanted to according to our targets during this year. But as said, we have taken measures. We are managing the business diligently. We have secured our financing going forward. And we feel that our strategy will be very valid also going forward once this crisis is over. So we feel confident that we will survive this crisis and come out as a stronger company, and then we will continue our path to become EUR 500 million company with 10% EBITDA levels.

Should you have any questions at any time, so we are happy to answer any kind of questions also outside this session. So myself, Per-Anders Gådin, our CFO; or Outi Torniainen, our SVP for marketing and communications, are available for you at any time. So thank you very much for listening, and I wish you good health in this crisis.