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Edited Transcript of HH.CO earnings conference call or presentation 13-Nov-19 3:30pm GMT

Nine Months 2019 H+H International A/S Earnings Call

Copenhagen Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of H+H International A/S earnings conference call or presentation Wednesday, November 13, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bjarne Pedersen

H+H International A/S - VP of Business Development & IR and Chief Strategy Officer

* Cristina Rønde Hefting;Investor Relations Manager

* Peter Klovgaard Jørgensen

H+H International A/S - CFO & Member of the Executive Board

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Conference Call Participants

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* Alexander Borreskov

Carnegie Investment Bank AB, Research Division - Analyst Assistant

* Kristian Tornøe Johansen

Danske Bank Markets Equity Research - Senior Analyst

* 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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Welcome to the H+H International A/S Interim Financial Report Q1 to Q3 2019.

(Operator Instructions)

Speakers, please begin.

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [2]

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Good afternoon, and welcome to the conference call on H+ H interim report for the first 3 quarters of 2019. My name is Peter Klovgaard Jørgensen; and with me is CEO, Michael Andersen; CSO, Bjarne Pedersen; and our new Investor Relations Manager since mid-October, Cristina Rønde Hefting.

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Cristina Rønde Hefting;Investor Relations Manager, [3]

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Hello, everyone. Happy to have joined H+ H, and I'm looking very much forward to continuing the good dialogue with investors and analysts.

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [4]

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Now we'll take you through the presentation, which is also available on our home page. Webcast is recorded and will be available afterwards on our website.

On Slide 2, there is an agenda, a few facts around H+H and the disclaimer on forward-looking statements.

On Slide 3, the financial highlights. Overall, we continue to see a strong operational performance. In the quarter, we had an organic growth of 5% and tracking 10% year-to-date. Gross margin is 34% in the quarter and 31% year-to-date. So the strong gross margin for the quarter as production continues to perform well. EBITDA of DKK 182 million in the quarter and DKK 435 million year-to-date. EBIT margin is at 15% in the quarter and 12% year-to-date, and our ROIC is running at 19%. Year-to-date investments are at DKK 56 million, excluding IFRS 16 impacts. And overall free cash flow development in the quarter is positive and at DKK 261 million after the adjustment of IFRS year-to-date. Net interest-bearing debt is DKK 471 million, which is equivalent to a gearing of 0.9x EBITDA. Equity as of end of September amounts to around DKK 1.3 billion.

Going to Slide 4, we see the cash flow statement. Overall, we see a positive effect from the operating income of DKK 313 million. We have an adverse impact on the net debt from IFRS 16 of DKK 91 million from the restatement in the beginning of the year. And then during the year, we've had DKK 72 million in investments, including IFRS 16. And then finally, we had an impact of acquisitions of DKK 95 million. We iterate -- reiterate our long-term target on financial gearing of between 1x and 2x EBITDA.

At Slide 5, we have the outlook. Looking at the guidance, we have seen a slowdown in the German market, where we've seen a delayment in execution of orders. This is expected to influence our organic growth for the rest of the year, why we have adjusted the guidance to around 6% from previously around 8%. Despite this adjustment of organic growth, we continue to see a positive development in EBITDA and are therefore maintaining the overall guidance. As we're approaching year-end, we have narrowed the interval. In the narrow span, we have therefore further increased our midpoint guidance with DKK 5 million. Hence, EBITDA is expected to be between DKK 525 million and DKK 545 million from previously DKK 510 million to DKK 550 million. Same increase in EBIT, so EBIT projection is now between DKK 345 million and DKK 365 million from previously DKK 330 million to DKK 370 million. The guidance on investments are unchanged at DKK 140 million as we still believe that we can catch up delayed investments for the year.

On Slide 6, we focus on Western Europe segment. Overall, we had an overall increase in revenue, but the organic growth is negative by 1%. EBIT (sic) [EBITDA] is at DKK 115 million for the quarter and DKK 288 million year-to-date. And finally, our EBIT is at DKK 79 million for the quarter and DKK 170 million -- DKK 187 million for the year-to-date. The adverse organic growth in the quarter is related to the lower volumes despite better pricing in all regions. Prices are higher in all markets compared to the same period last year. And in particular, German (sic) [Germany], as previously mentioned, is impacted by a volume decline, which is mainly caused by a delay in customers execution of standing orders. The adverse market development in Germany is more than offset by pricing and improvements in the EBITDA, which is partly due from synergies of the recent acquisitions and general production improvements. U.K. experienced a quarterly decline in revenue, which was a combination of stock movements last year and slower markets. Year-to-date, the organic growth comprised a combination of both price and volume. Overall, improvement in EBITDA is strong and is a combination of higher prices and strong operational performance stemming from reduced usage, procurement efforts and a stable PFA supply.

Turn to Slide 7. We have the Eastern Europe segment. Overall, very high organic growth continues in the Eastern Europe region with -- amounting to 20% for the quarter and 18% year-to-date. EBITDA also considered very, very strong at DKK 83 million for the quarter and DKK 200 million year-to-date and EBIT at DKK 73 million for the quarter and DKK 172 million year-to-date. The organic growth is predominantly driven by higher price -- sales prices in Poland. Sales volumes were capped at our production output, which is also impacting our inventories overall being at a -- under constraint. Continuous positive impact from synergies from the acquisitions in 2018. Market outlook in Poland remains strong, yet additional capacity from competition exceeds current market growth. Expected cost pressure, partly offset by optimizing supply, mix and usage.

And then finally, in relation to the Eastern Europe segment, as we announced on the 1st of November, we have divested the Russian activities with an effective date 31st of October. And the funds was received here in Q4 already.

On Slide 8, a few more details around the Russian divestment. Also already, as outlined in the annual report 2018, we were looking into potentially changing the strategic position in the Russian market. That was completed by -- at the end of October by the sale to the Russian competitor called LSR. The agreed enterprise value of the business was DKK 93 million, and the net cash proceeds received is DKK 117 million and has been received in cash. The net proceeds will be used to reduce the net interest-bearing debt and will be used to develop existing business and pursue value-added investments in the form of acquisitions within the debt gearing indicated in the long-term financial targets.

Moving to Slide 9. We basically continue to optimize our geographic footprint. So following the divestment of Russia, we can now further increase our focus on the 3 core markets, in U.K., Continental Western Europe and Poland. Continue -- U.K. continues to be a strong market and has increased its earnings. Outlook in the midterm remains strong. Current U.K. exposure is around 30% of the total revenue of the group. The Polish market has, in recent years, been consolidated and improved its returns. The market outlook continues to be positive. M&A agenda continues for Central Western Europe.

On Slide 10, we have a status on the German M&A activities, where we can still say that we have a continuous dialogue with potential sellers. The market participants do see a need for consolidation, and H+ H is in a unique position in terms of antitrust regulation being below EUR 500 million in total group revenue. As you see on the map, there are different focus areas, and we basically covered into 3 overall regions. In the western region, we see synergies in terms of cross-selling optimization. In the north area, we see the opportunities for market consolidation to create synergies and also improve geographic exposure around billing. And finally, in the south and east -- southeast region, we can improve the national presence and thereby gain further market share.

And now ready for the Q&A. Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from 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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Welcome to the team, new members. I hope you've been integrated well to the management of H+ H. My first question is regarding your organic growth levels here. Can we assume that it's 100% attributed to a slowdown in Germany? And is this sort of a new tendency that you're seeing? Or is there maybe some postponement of orders or something like that which were surprising to you?

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [3]

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So overall, the new view on the guidance is, in all main reasons, driven by Germany. And we continue to have a strong pricing performance in the German market, so it is volume driven. And as we have continued to see orders coming in, we had not previously been seeing that this sort of delayment would be coming through. But that is what we have now been starting to see and also our latest forecast predicts.

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

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So the delay is perhaps mainly in August of orders that you received, but it was not realized. Is that fair to assume?

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [5]

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Yes. So overall, you basically see our order book building. You could say so that they are coming in and have the projects, but they're not executing those.

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

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That's fine. And what about the U.K.? Any worries here for investors in terms of organic growth? I mean you obviously have good numbers here and good exposure to the help supply program, but any areas which perhaps is also realizing a slowdown which we hear from some of your peers and competitors?

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [7]

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What we see in the U.K. market is somewhat of a product mix. So we see that the sales coming through the merchants have received or has experienced a slowdown and a flattening, whereas we then see in return the volumes from the volume housebuilders picking up. So therefore, we do experience somewhat of a product mix in the U.K. business. I think fundamentally, as we expressed, we still see a solid performance in the U.K. market, and we see a solid market also in the midterm.

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

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In terms of volume there in Germany, just one question, a follow-up question there. Just we -- are you seeing such a slowdown that you may have to take out shifts off any of your factories? Or are you still continue that maximum capacity at -- in Germany but also all your factories, are you still sort of at maximum capacity?

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [9]

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Yes. So we are basically still running at full capacity also in the U.K. And you can say that the one thing that we also announced previously that really impact the organic growth as such, and of course, included in this outlook is the destocking of the U.K. inventories that happened in Q4 last year, whereby sales were sort of boosted, if you will. And that means that the organic growth will be impacted by that this year.

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

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Just one last question, technical question. On sort of a 3-quarter rolling, you've reported depreciation of DKK 130 million negative, and you also reiterate here your depreciation expectations of around DKK 180 million. But I mean the depreciation model, high for Q3, is there any one-off in depreciation for Q4 that we're missing?

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [11]

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For the third quarter, you have some depreciations in regards to the order book that was taken over the acquisition of the Baustoffwerke Dresden. So that's why they're a bit higher than the average you would take.

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Laurits Louis Kjaergaard, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [12]

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So this would assume into Q4?

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [13]

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Only marginally.

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Operator [14]

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(Operator Instructions) Our next question is from Kristian Johansen from Danske Bank.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [15]

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So on your comments around Germany, you say that orders come in, but then they are delayed and not executed. So I guess that's the picture for Q3. So my question is are orders still coming in here in Q4? So do your backlog essentially just keep building but delays keep happening? Or are you starting to see a decline in orders as well? Or what's the dynamics?

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [16]

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No, overall, we actually still see the activity of incoming orders, but you can say the order book, as such, is simply not being executed in the same speed as it's -- as they are incoming.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [17]

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Okay. And then just to clarify, the decline in revenue in the U.K., that is solely due to a tough comparison, right? So you are running U.K. at full utilization in the quarter.

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [18]

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Yes, we are. We are, and we'll continue to see very positive production output from our Borough Green upgrade.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [19]

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Then if my quick math is correct, your guidance implies minus 5% organic growth for Q4. Can you quantify how much of that is related to the destocking effect in the comparison for the U.K.?

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [20]

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I don't have the specific number on that. Let me do a follow-up.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [21]

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Okay. Because obviously, what -- I guess what we are looking at here is obviously any sort of data point to point us in the direction of what to expect for next year. And I guess minus 5% then is obviously not the right number to use. But can you maybe just elaborate a bit on these rends you're seeing right now whether -- I mean is it your expectation it should continue like this into next year? Or are there any things you, at this point in time, know will be different?

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [22]

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I think that if I -- if we are talking about the overall market, Kristian, we will say -- we can say that there is an expectation that market will grow in England next year when we look at the overall expectations, and that is largely driven by volume housebuilders. If we look at the situation for us in Germany, the situation has been throughout the year that we have managed to have high price levels on both product lines. And we have seen that there is a lack of execution on the order portfolio where the consequence for us has been that our order backlog, especially for the high rise segment, has been increasing. If you look at the outlook for next year, it is flat to slightly declining when we talk about the overall market. We say that if you look at our aircrete business that I can say that we have, to some extent, in the first 9 months here because of the price that we have insisted on, which has also given us improvements on the P&L, may have cost us some market share. If we look at Poland, our other big market, we expect the Poland will be at a high activity level next year, but we also have announced that we are seeing increasing competition from new capacity being added on CSU and to some minor also imports from Benelux due to the -- I think it's because of there's a tipping point for the pricing, right? But it's still on a minor level, what we have seen of imports in Poland. So still strong, construction level output in Poland and England and increased competition in Poland, a slightly decline in the activity levels in Germany. That's the overall market prediction.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [23]

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Okay. And then just to touch upon Germany again. So the volumes you don't sell, are you able to compensate by selling in the Nordics or in Benelux? Or what's the dynamic -- can you still run your German plants at full utilization?

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [24]

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When we talk about aircrete, it is our belief that -- because that's what we are selling in the north, and so I believe that we will be running at high capacity utilization next year.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [25]

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Okay. And on calcium silicate, actually, I think, today, I saw you advertising in your Danish business that you're going to start selling aircrete in Denmark. So is that as a consequence of this or...

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [26]

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No. I think that we will always be looking for cross-selling opportunities, and the situation in Denmark has been that there has been on the supplier of specialty concrete panels, and there are bottlenecks issues here, where we see that there is a room for calcium silicate, and we're trying to market that. But it's not going to be, at least in the onset, going to have any significant impact on our results.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [27]

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Okay. And if you continue to face a declining volume trend in Germany, can you still increase prices? Or will there be a tipping point eventually where prices will have to go down as well?

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [28]

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I think that from an overall point of view, we are continuing our efforts to consolidate the market, and we think the consolidation of the market is what is going to help in that respect. We've talked about that so often. We have seen good price increases this year. Whether we can get also significant above inflation next year will depend on the competitive situation, obviously. So it's a combination of whether the market outlook that we see from an overall point of view is, as we say, slightly decreasing and in combination with that, what would be the reaction from minor competitors. And I'll be succeeding with our acquisition activities.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [29]

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And on that point, that was my last one. So Michael, you've previously said that, on a personal level, you hope to announce an acquisition this year. Is that still the case? Because obviously, there's limit to time left.

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [30]

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Yes. I would say that, overall, I would be disappointed if we don't do that. But of course, time is running out, but I can assure you, we are working on it.

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [31]

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Just to get back to the unresolved answer of the negative organic growth for the fourth quarter, around 2% would be attributable to the destocking we had last year in the U.K.

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Operator [32]

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And our next question is from Alexander Borreskov from Carnegie.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [33]

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Most of my questions have already been taken, but just one on -- you mentioned that you might have been giving away market share sort of to keep the pricing. Do you have any indication of how much of the volume decline you saw in Germany was due to sort of the general market decline and how much was because you're actually defending your pricing?

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [34]

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If we take it from an overall picture and look at the total revenue in Germany, it has been a minor percentage.

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Operator [35]

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(Operator Instructions) And as there are no further questions, I will hand the word back to the speakers for any final comments.

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Peter Klovgaard Jørgensen, H+H International A/S - CFO & Member of the Executive Board [36]

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Okay. Thank you very much to all of you. I wish you all a nice evening. Thank you.

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Bjarne Pedersen, H+H International A/S - VP of Business Development & IR and Chief Strategy Officer [37]

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Thank you very much.