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Edited Transcript of HART.CO earnings conference call or presentation 14-Aug-19 7:00am GMT

Q2 2019 Broedrene Hartmann A/S Earnings Call

Gentofte Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Broedrene Hartmann A/S earnings conference call or presentation Wednesday, August 14, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Flemming Steen

Brødrene Hartmann A/S - CFO & Member of Executive Board

* Torben Rosenkrantz-Theil

Brødrene Hartmann A/S - CEO & Member of the Executive Board

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Conference Call Participants

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* Christian Reinholdt

Small Cap Danmark A/S - MD, CEO & Director

* Laurits Louis Kjaergaard

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Hartmann Q2 Report 2019 Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today on Wednesday, the 14th of August 2019.

I'd now like to turn the conference over to your presenter today, Torben Rosenkrantz-Theil, CEO. Please go ahead, sir.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [2]

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Thanks for calling in today for our presentation of Hartmann's Q2 results. My name is Torben Rosenkrantz-Theil, and I'm pleased to have our CFO, Flemming Steen, at by my side on today's call.

Let's kick off the presentation with the highlights for the quarter before diving into business developments and financials. After that, we'll provide a brief update on the Think ahead strategy before turning to the 2019 guidance and opening the line for your questions.

Please turn to Slide 2 for the highlights. We were pleased to grow revenue by 6% in the core business on the back of higher volumes in Q2. Demand for our products was good, and we sold more packaging across our markets. Our European and North American activities reported strong volume growth while volumes in South America increased moderately. Group revenue came to DKK 553 million in Q2 with an expected low contribution from the technology business.

The quarter was marked by higher raw material prices and the low contribution from technology sales against a strong quarter last year. Still, we were able to safeguard profitability and maintain a solid profit margin of 8.5% by improving utilization and efficiency at our factories as well as the average selling price for our products.

We increased investments to DKK 49 million this quarter, and we'll continue to add capacity across our production network in the coming period. During Q2, we commissioned new capacity in the European business and Argentina to accommodate increasing demand. We will continue the efforts to build our production capacity in the European segment in the second half of 2019. In the longer term, we expect to commission additional capacity in 2020, a new factory will be established in Brazil, more production lines will be installed at our plant in the U.S., and we will ensure further expansion in the European business in 2020 as well.

As described earlier, technology sales are expected to be at a normalized lower level in 2019 compared to higher levels in recent years, and we see a pickup in deliveries from our technology business in the second half of the year.

On the next few slides, Flemming will update you on the segment performance and the financials for the quarter. Please turn to Slide 3.

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Flemming Steen, Brødrene Hartmann A/S - CFO & Member of Executive Board [3]

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Thank you, Torben. The business performed well in Q2 as we sold more packaging and benefited from good capacity utilization at our factories. Even though our technology sales were significantly lower this quarter, we grew group revenue by 2%. Our American activities generated solid revenue growth of 7% and a relatively stable profit margin of 12.6%. While volumes were up across our American markets, the strongest development was reported in North America where revenue increased significantly.

The South American business grew volumes and revenue moderately as we were impacted by negative currency effect in Argentina. Profitability improved in North America based on volume growth and improved production efficiency as well as positive effects from currency fluctuations and lower raw material prices. In South America, we saw the exact opposite development. Currency and raw material prices had a negative impact, which was not fully compensated by revenue growth and improved selling prices.

The financials for our European business were impacted by the expected low technology sales of DKK 6 million this quarter against DKK 35 million in Q2 last year. The core business grew packaging volume and boosted revenue by almost 9% to DKK 311 million as we successfully increased the share of retail packaging and improved the average selling price. Along with higher production efficiency, these effects had a positive impact on profitability. Still, we saw the profit margin declined to 7.5% due to lower technology sales and higher raw material costs.

Let's move on to the financials on Slide 4. The positive developments in our core business led to an increased in group revenue to DKK 553 million after a minor positive impact of restatement for hyperinflation in Argentina this quarter.

Please refer to the appendix in this presentation for a breakdown of hyperinflation adjustments, which had a significantly smaller impact on figures in Q2 and the first half year of 2019. At the same time, please note that these technical accounting adjustments do not affect Hartmann's underlying business and operational development.

Operating profit declined to DKK 47 million before restatement for hyperinflation as the progress in our core business could not fully outweigh the low technology sales and higher raw material prices in this quarter. Despite these significant adverse effects, we managed to protect profitability and generate a solid profit margin of 8.5% at group level. Profit for the period increased significantly to DKK 26 million as Q2 last year was impacted by special costs relating to the Perform 2018 program as well as higher financial expenses.

The sizable investments during the quarter impacted our free cash flows, which came through an outflow of DKK 31 million against an inflow of DKK 38 million in the comparison period.

Invested capital has increased to just above DKK 1.5 billion driven by a high investment level as well as the adoption of IFRS 16 leases, which has increased invested capital by roughly DKK 75 million. The significant decline in return on invested capital is caused by lower operating profit for the rolling 12 months as the vast majority of technology sales were booked in the first half year of 2018 while technology sales will be booked in the second half of this year. In addition, invested capital has increased significantly as already mentioned.

Torben will now provide you with a brief update on our Think ahead strategy. Please turn to Slide 5.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [4]

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Thank you, Flemming. Based on the increasing demand for our sustainable packaging products, we maintained our focus on ensuring that Hartmann is able to accommodate our customers' needs this quarter and in the longer run. We are thinking ahead and strengthening our market positions by leveraging 3 positive macro trends.

Firstly, population growth and a larger middle-class entails higher egg and food consumption, and urbanization drives retail trade and increased demand for retail packaging.

Secondly, consumers care about the environment and retail chains are beginning to embrace this change and announce intentions of reducing plastic packaging. We will be ready to help them reach their targets.

Thirdly, consumers also care about health, nutrition, local production, recycling and animal welfare. Packaging solutions that contribute to a clear differentiation of specialty eggs on supermarkets' shelves are therefore a very valuable tool for retail chains.

We apply our specialized expertise in egg marketing and production of molded fiber packaging to assist our customers in addressing these attractive market drivers. Our solid production platform is expanded to serve our customers with Hartmann's versatile product portfolio tailored to fit the specific demands across our markets. Our proven technology competencies are put to good use at our own factories, and external orders are being processed as well. Our key focus areas continues to be capacity expansion, efficiency improvements and intensified marketing efforts.

Please turn to Slide 6 for an overview of our markets and current initiatives. A large part of the European market is relatively mature with strong demographic growth drivers in Eastern Europe and a significant conversion potential in selected markets where plastic products still hold a large market share.

In Q2, we expanded our market leadership in Europe as we commissioned new production capacity and prepared the addition and commissioning of more capacity at 2 factories in the second half. In addition, we continued to strengthen the European business through increased marketing efforts as well as automation and deployment of new technology at our factories.

If we turn to North America, we see favorable demographics and an increasing consumption of eggs as well as rising interest in eggs outside the caged-egg category. Step by step, these positive drivers will be supplemented by an accelerated conversion from plastic-based packaging.

We continue to make great progress in North America in Q2 and decided to invest around DKK 100 million in expansion of the U.S. factory in 2019 and 2020. We expect to commission the new capacity towards the end of 2020, and we are intensifying marketing efforts to drive sales, win market shares and continuously improve capacity utilization at our 2 factories.

The South American business will benefit from positive demographic developments and increasing egg consumption as well as an overall development and refinement of the egg category in the retail sector. We added capacity in Argentina during Q2 and continue to prepare the addition of another factory in Brazil, which is still expected to be commissioned in 2020. We maintain our focus on automation and technology upgrades at our existing factories as well.

Let's add a few comments on our guidance for the year on Slide 7, please. We maintain guidance for 2019, expecting revenue of DKK 2.2 billion to DKK 2.4 billion after restatement for hyperinflation and a profit margin of 9% to 11% before restatement for hyperinflation. We expect volume growth and higher selling prices to have a positive impact on our results for the year along with improved capacity utilization and efficiency. On the negative side, we see higher raw material costs and the impact of normalized technology sales.

Our decisions to establish a new factory in Brazil, expand our capacity at the U.S. factory and add additional capacity in the European business entails relatively high investments in 2019. And we have announced an expected CapEx level of roughly DKK 300 million before restatement for hyperinflation and excluding any potential acquisitions. We are maintaining this expectation today.

With that said, we now look forward to taking your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your next question comes from the line of Laurits Kjaergaard from ABG.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [2]

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A few questions from me. The first one is on Argentine where you have a bit of business there, less than 10% as you've previously announced. As we know, the season is a little bit different with summer and autumn season falling in -- from December to May. Can you give some insights here? Because it's quite important as we see a lot of volatility in the Argentine economy at the moment, and it seems that most of your sales, correct me if I'm wrong, actually occurs in the first half of the year. So there should be less sales for you going forward in the second half in Argentine.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [3]

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Well, just right off the bat, agreeing to your statement that we have a larger first half of the year than second half of the year. But you're also right that the political and economical climate in Argentina grew slightly more volatile late last week with the primary election and not having the outcome that the markets had looked for. But we maintain a positive outlook for the products we are selling in Argentina. We have expanded our capacity in Argentina despite the volatility and the seasonal fluctuations that we have. First half to second half are completely normal as the food product sales are obviously and always in the first half of the year.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [4]

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Okay. That's very clear. On technology sales, which you already mentioned in your presentation and we talked about in the Q4 and Q1 call, you -- I have asked before if we can give some sort of range in technology. And I guessed before, DKK 60 million to DKK 80 million, which you sort of confirmed, could you give some insights into the majority coming in the second half? How comfortable are you with the technology arriving in the second half? And could you give some insights to when it will be arriving, Q3, Q4, just to perhaps manage expectations for the coming quarters?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [5]

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Well, we can say with certainty, we will have technology sales in the 2 coming quarters. We know what we have on the order book, and our team is working diligently to process those orders. So we know it's coming. We know it will be at the lower level compared to previous years, but we know it's coming, and we will have that revenue spread over Q3 and Q4. And that breakdown of how much is coming in Q3 versus Q4 is one that we don't provide.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [6]

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Okay. On CapEx, now guiding DKK 300 million, basically given, let's say, 2 upgrades this year of DKK 150 million in total, but then deducted the DKK 50 million with expansions in Brazil and U.S.A. A few insights here because it seems that you start the year with DKK 200 million and suddenly it's DKK 300 million. It seems quite a leap in already going into 2 quarters. Is it surprising to you that you have increased CapEx? Or is it just great opportunities that you suddenly come across?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [7]

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Well, we see that as a positive reflection that our business is doing well. We are growing everywhere. When the year comes to an end, we will have expanded 3 plants in Europe. And we have taken decision to expand further next year in Europe. And when the year comes to a close, we will have expanded in South America. And we have taken decisions to increase in Brazil, as we have reported earlier. And then we have the large expansion in North America coming next year. So while the amount is high, certainly, we will take that with a smile and as a sign that our business is doing very well indeed.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [8]

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You mentioned expand further into Europe, is it the same level as this year in regards to Europe?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [9]

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We provide the guidance 1 year at a time. And today, we can tell you the guidance for this year is DKK 300 million.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [10]

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Fair enough. Last question, I looked at -- especially in Americas for this quarter, and it looks very good with strong capacity utilization. For me, it seems like you could have upgraded your margins given sort of stable into the year. Are you more uncertain than before? Or do you believe that Q1 -- or Q2 was actually in line with what you were expecting previously for Americas?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [11]

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Well, we don't provide guidance or expectations in that sense on a segment-by-segment basis. As we report in Q2, we have seen very high raw material prices in South America, maybe less so in North America. So from that standpoint, the performance of the American segment is very much a mixed bag, and we continue -- or we expect that to continue in the coming quarters.

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Operator [12]

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(Operator Instructions) Your next question comes from the line of Christian Reinholdt from Small Cap Danmark.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [13]

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I'll touch upon some of the issues that the previous also asked. Argentina, how are you thinking about protecting your business down there? It seems like the economy is collapsing. We saw this decline in the currency, 30% the other day, and stock market went down 50%. So how can you protect your business in Argentina in these circumstances?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [14]

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Well, we have a team that is very well trained in increasing prices, which is absolutely a very and necessary skill in the current high inflation environment. And of course, if the inflation further shoots up, that skill will be put into play in the coming period. Also we have had to tighten our policy for trade receivables, and we're diligently watching that. The current situation is delicate, of course. But on a daily operational level, the impact is maybe less so than the overall financial level impact is.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [15]

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Can you tell us how much the book value of the operation in Argentina is in Danish kroner?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [16]

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No. That's not a breakdown that we provide, Christian. Sorry.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [17]

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Okay. Let's turn to Europe then. You have quite a dramatic -- EBIT margin fell quite dramatically in Europe. Could you split it between raw material prices and the less turnover from technology?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [18]

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Flemming, will you take that question?

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Flemming Steen, Brødrene Hartmann A/S - CFO & Member of Executive Board [19]

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No, not in details, but we can certainly say that most of it is technology sales. So that's what we see.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [20]

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If we include technology, do we have the same margin then in Europe as last year in Q2? The EBIT margin went down from 12.6% to 7.5%, so it's quite dramatic.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [21]

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Well, that's a very hypothetical question. What we're reporting is what we have realized. And if we look at the European packaging business, in many ways, we feel very good about where we were at. We have been challenged by high raw material prices, and we have managed to mitigate those cost prices through increasing our volumes and by increasing our average selling price. From that standpoint, we feel very happy and proud to be able to maintain the guidance for the year of 2019. And clearly, a well-running European engine is very much required to maintain such guidance.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [22]

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That's obvious. Regarding the technology and the turnover, as also was addressed before, you had DKK 115 million in the last couple of years. And now you are saying it's going down to a normal level. What is a normal level? Is that the DKK 75 million, DKK 80 million? Or what do you mean by that?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [23]

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Well, I think we had a slip of the tongue in an earlier call, also echoed by Laurits earlier in the session today. A normalized level is somewhere around DKK 60 million to DKK 80 million, which is what we have seen in the years prior to the very, very good years we have had in technology the last couple of years.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [24]

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And you expect this to be the level also going forward also into 2020?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [25]

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Well, let's take one year at a time. This year, it will be 20 to -- sorry, DKK 60 million to DKK 80 million as a normalized level.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [26]

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But if it's normal then, it must also be normal next year.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [27]

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No comments, Christian.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [28]

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Okay. My last question is really, you have this long-term goal of EBIT margin of 14%. I expect this is still standing. Would you say the development this year has brought you closer to that target? Or is it still very far out in the future?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [29]

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Well, I think the improvements to the underlying business coming from capacity expansion, coming from efficiency improvements, et cetera, certainly, will help us reach that target at some future point. Of course, 2019 will be characterized by needing to recover from a very high increases in raw material prices. And we are on track to maintain our solid profitability despite those cost challenges, and that's the highlight for this year. But certainly, the sharpening of the underlying machine and the capacity expansion will help reach that target in the future.

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Christian Reinholdt, Small Cap Danmark A/S - MD, CEO & Director [30]

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My last question really is regarding the raw material prices. When can we see this level off? How is the -- is it still rising or is it at a stable level now? Or how should we think about this?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [31]

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Well, predicting the raw material prices is a very hard job. We see very different dynamics across our different areas of operation, and we have been very sharply hit in some areas whereas in other areas, the impact has tapered off. So it would be foolish of us to try to make predictions. What we can do and what we have done is taking measures within the business to mitigate the impact. And of course, if we get lucky and it declines, we hope that we can see that in our profitability. But we are very proud that we have managed to mitigate that impact this year. It has been a big challenge for our local teams.

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Operator [32]

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(Operator Instructions) We have another question from the line of Laurits Kjaergaard from ABG.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [33]

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Just one question on the Q2 effective tax rate of 32% despite more activity in the U.S. You explained it by the restatements of hyperinflation, but also you mentioned there's a small effect in Q2. What can we expect on taxes going forward, if you have any comments there?

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Flemming Steen, Brødrene Hartmann A/S - CFO & Member of Executive Board [34]

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No. We don't really have any effects -- any comments to taxes going forward. You can say, for the years, we've hovered around the 24%, 25% for some, but it's difficult to say how that's going to develop going forward.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [35]

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So normalized level without sort of hyperinflation restatements is 24%, 25% levels, is that what you're saying?

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Flemming Steen, Brødrene Hartmann A/S - CFO & Member of Executive Board [36]

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Yes. There would be -- without giving any guidance, but that will not be unrealistic.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [37]

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Okay. Even though that you expect to have more activity in the U.S., which generally has a lower tax rate than what we're seeing in European countries?

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Flemming Steen, Brødrene Hartmann A/S - CFO & Member of Executive Board [38]

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We expect to have more activities in all regions.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [39]

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Fair enough. And then just one other question. In the second half of '19, with the new CapEx investments, can we expect any special items where you had a lot of them last year [exempt]?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [40]

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If we can expect that for '19?

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [41]

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In the first -- second half of '19, any special items there with the new CapEx upgrades basically?

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [42]

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No. At this point, there are none such items on the radar.

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Operator [43]

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(Operator Instructions) So we have no further questions.

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Torben Rosenkrantz-Theil, Brødrene Hartmann A/S - CEO & Member of the Executive Board [44]

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Well, in that case, let's conclude the call. Have a wonderful day, everyone. Thank you.

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Operator [45]

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That does conclude our conference call today. Thank you for participating. You may all disconnect.