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Edited Transcript of MOBN.S earnings conference call or presentation 2-Aug-19 12:00pm GMT

Half Year 2019 Mobimo Holding AG Earnings Call

Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Mobimo Holding AG earnings conference call or presentation Friday, August 2, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Ducrey

Mobimo Holding AG - CEO & Member of the Executive Board

* Manuel Itten

Mobimo Holding AG - CFO & Member of the Executive Board

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Conference Call Participants

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* Dennis De Jong

Kempen & Co. N.V., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Half Year Results 2019 Conference Call of Mobimo Holding AG. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Daniel Ducrey. Please go ahead, sir.

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [2]

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Thank you very much. Dear ladies and gentlemen, I would like to welcome you to the presentation of the half year results of Mobimo Holding AG. My name is Daniel Ducrey. I'm the CEO. And together with me is Manuel Itten, our CFO.

On the front page of our presentation, you will find a picture of the Aeschbachquartier, a view from the side of the condominiums and the Aarau park in the middle of our development, which has already established itself as a center of attraction for families and children. We'll come back later. But let me already tell you this, it is a successful good development which we were able to realize in Aarau.

First, I would like to explain a few highlights of the first 6 months of the year, then Manuel Itten leads us through the financial figures. Then I will go into the projects and the pipeline. And finally, I'll give you some outlook on the second half of 2019.

Yes. As planned and announced, a change in leadership and the composition of the Board of this Directors and the senior management happened in the first half of this year. Georges Theiler and Peter Barandun left the Board of Directors. Chairman of the Board of Directors is now Peter Schaub, and Bernadette Koch and Christoph Caviezel have joined the Board. In the management, I could take over the responsibility as CEO from Christoph Caviezel. Thomas Stauber left us, and Christoph Egli joins the management Board. With these changes, we have lowered our average age in both Boards and also have more diversity on all aspects.

On a personal note, today, I can say that I started well the work with the staff, the Executive Board and the Board of Directors is smooth, and we are now on the way to continue writing the future of Mobimo. On the operational side of our business, the completion of some important projects as well as the start operating them was a very important step, along with continued -- to progress on the construction side and developing the projects out of the pipeline.

So what is for the Seehallen in Horgen, which we could now take in our real estate portfolio? The history of the development of this projects has brought with it some challenges that have been well mastered. A concept for mixed use with traditional office spaces, new forms of work, like co-working, then retail and various shops and showrooms and workshops have been successfully marketed, first, from an external agent and now, for the last part, with internal resources and capabilities. Leading food store is operational and works very well. The parking is often well filled in the morning, and all the tenants are also satisfied about their rooms.

Looking at the market in general, we observed that the retail is under pressure everywhere. In the first-class location, obviously, like in the Flon, not so much or even not at all. But a second-class location has become more difficult. Both the buyer behavior as well as the range of offer puts pressure on the earnings of the businesses in general and lose also on the evolution of the rent. In order to be successful, one must necessarily bring something better, stand out and differentiate. Therefore, an in-house marketing team is valuable. In our marketing team -- and our marketing team is very direct and active, close to the customers, expect their needs and strive to give them the right answers.

Another important milestone was the opening of the Aeschbachquartier on April 4, 2019. This was when we handed over this new district to the population to become an integrated part of the heart of the city. This development started in 2001, and over many small and big steps, then reached the realization phase by 2013 with the blowing up of the (inaudible) tower. Now it is finished and [lived]. Of course, the very high occupancy rate that we have already achieved confirms all the positive forecasts that have been made. To date, we have already achieved almost 90% renting of the apartments, and this is in a canton which had Swiss record for the highest vacancy rates for apartments in 2018. We are very much satisfied with the development of this investment object.

In general, we continue to see greater selectivity in the market for new housing projects when it comes to geographic location. However, the competition on well-located and connected land plots, which can be developed, is still high, even sharper than before. Demand at the very high level is also unbroken for existing properties that can be included in investment portfolios. And the hint given by the Swiss National Bank with comments on the interest rate policy does not indicate any rapid turnaround. Therefore, the real estate market -- the real estate transaction market will remain very interesting.

Then we were able to completely integrate the Fadmatt portfolio in our asset management. The whole process went smoothly and did not bring forward any unforeseen elements. We now work on all properties with our processes in our system. All in all, we have, for the first time in our history, rental income over CHF 60 million. Manuel Itten will tell you more about it in the financial section. But so much in advance, 2019 to -- both Fadmatt and Labitzke will be fully effective and produce for the whole year a stable rental income, and this for the first time. We are therefore fully in line with our strategy of constantly increasing rental income and steadily increasing its share in our total profit. During this first half year, the remaining 34% of the shares of BSS&M, they're acquired. (inaudible) -- that 2 of the company is now 100% owned by Mobimo as well as the resulting profit.

And as far as the reevaluation gains are concerned, these were particularly strongly influenced by operating activities in this half year. Integration of the Seehallen and Aeschbachquartier, naturally, as well as the progress on the -- on our project development sites had a strong positive impact. It underlines and it reflects the contribution that the development of our own real estate asset projects can make and then make to the overall performance of Mobimo. It is an important link in the value creation chain, which is characteristic to Mobimo.

I would like now to hand over to Manuel, who leads us through the financial part.

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Manuel Itten, Mobimo Holding AG - CFO & Member of the Executive Board [3]

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Thank you very much. I would like to welcome you, too, for the presentation of the chief financial figures in the first half 2019.

We are looking back to a successful start in 2019, and we have first time achieved, as already mentioned, a rental income in the first half of the year which is higher than CHF 60 million. If you compare the chief result, it's exactly 11% higher than the result in the first half 2018. The direct cost-to-income ratio for rented property was coming down to percentage of around 14%, which is more on a higher -- on a lower level than expected due to the fact that we have still ongoing work in first-time lighting for all our new properties, which were built out of the pipeline and then taking place and [probed] to the portfolio during the year. So we expect for the second half of this year, due to the ongoing first-time lighting work, further pressure on this low direct cost-to-income ratio.

The profit on development projects and sale of trading properties was, as we have already seen in the past, always in a -- on a [flotating] days. So that means not each period is representing the same level. We started with a lower level in 2019, too, with CHF 2.4 million. And we expect, due to the ongoing work on our pipeline and production of offers for third parties, 1/4 is -- are residential properties and investment properties for third parties. Due to the fact of the ongoing production, we will expect a remarkable higher stake of income out of this sector in the second half of 2019.

Also, the gross margin achieved only CHF 2.4 million with 7% from the lower end, and we do clearly believe in the second half that we have, with a higher turnover, a rebalancing of the gross margin on the base, 12% plus, as you know already, as expected, gross margin on average on that type of project. The net income from revaluation was achieving CHF 18.8 million, more or less on the same level as in the previous year with CHF 17.7 million level. I will give you a little bit more color on the details on one of the next slides.

What is remarkable was the next point. So that means profit on disposals of investment properties was in the first year 2019 at 0. We don't need to dispose any property out of the existing portfolio. In the previous year, we have touched already result -- still a result of CHF 6.8 million out of a disposal of investment properties out of the existing portfolio. This was leading to an operating result of CHF 55.4 million compared with the previous year, more or less on the same level with CHF 57.3 million.

[A most] remarkable point was the fact that in Switzerland, the [rotation] was positively voted for in Switzerland in the first half of 2019 and was leading to a change in the Swiss (inaudible) and potential tax regimes, and this was leading, particular, for Mobimo in the cantons Geneva and St. Gallen to a change in the effects of a lowering in the expected tax rate for the future, and this was having a onetime impact on tax income expenses in the first half of 2019, which was around more than CHF 10 million.

I would like to turn your attention on Slide #6. Overall, we achieved a profit of CHF 43.6 million compared with the previous period. It was an increase of around 16%, the same level of increase you have seen already in the profits achieved, excluding revaluation gain. Also here, we have achieved a plus of around CHF 60 million. The gross yield created from investment property was unchanged compared with the end of the previous year 2018 at the level of 4.6%, and the net yield was slightly higher. So that means a little bit better cost ratio or also having a positive impact on the net yields created from the investment properties on a level of 3.8% compared to 3.7% at the end of 2018.

Now on Slide #7, you will see historically the development in the first graph on the left-hand side, the historical development of the vacancy rate. You will see we have seen a further decline compared to the previous period from 5.1% to 4.3%, and the vacancy rate in the middle of 2019 was in the expected range. when we take note about the situation that we went down in -- at the end of 2018 at a vacancy rate of around 2.9%. We have already declared historically low for our portfolio to have such a low vacancy rate represented, and we do expect -- then we declared already that we have to expect -- mainly due to the new building which are coming out of production pipeline portfolio, that we do expect in the first time a little bit -- a certain pressure on the vacancy rate due to the fact that each property is already fully let when it was handed over to the portfolio. We have seen that, of this 4.3% vacancy rate in expected range.

If you go closer to the detail, you can split this vacancy rate, 4.0% or 3% (sic) [4.3%] as commercial properties and 4.7% was represented by the residential properties. And here, you can see clearly where potential stays. So that means 4.0% is still a very low rate for commercial properties. We are very happy about the situation. We try to maintain that also in the future at such a low level. And on the other hand, this 4.7% shows you the room, where the room is left to further decrease the vacancy rate part, especially in the residential sector. And so we do feel, I believe, that we will also maintain depending on the particular situation of the projects, which were brought to the proper team in the close future. We still believe that we will stay on that more or less on a very interesting vacancy rates, too.

The income from -- and profits from -- on development projects and sale of properties, you will see on the right-hand side. You can see clearly the fluctuation between different periods, what is represented as additional income at this part of the company. And we do expect clearly for the second half a remarkable increase of the stake, which will come out of this section to the income stage due to the fact that we have a very good filled pipeline, and we are working on different projects to bring in deferred gain also in this sector portfolio.

On Slide #8, we will [to show] look at split of the revaluation gain. As already seen in the first half 2018, that was represented revaluation gain of around CHF 18 million by the investment properties under construction. This period compare was CHF 5.2 million out of this section. And some properties which were already shifted to the residential investment portfolio have also brought a very high revaluation -- final revaluation gain out of the development period to the portfolio. And both, together, has represented revaluation gain around CHF 11.7 million out of the construction of new properties in the pipeline for the own portfolio. So that means the work on that pipeline is unchanged, very interesting for the company and still will stay, also in the short term view, very interesting for the company, too, to work to progress in the pipeline towards own portfolio.

If you compare the on average capital weighted discount rate, there was nearly no change. The only decline we have seen on the discount rate from 3.92% to 3.89% was due to the fact that the progress in the construction was leading typically, as you know, from the valuation practice to a slightly lower discount rate. Like-for-like on existing -- that there was -- on the existing portfolio, there was no change in this (inaudible). Positive valuation gains were driven mainly by the operating work.

On the next slide, Slide #9, you will see we are still on the financing side, on a very good level with an equity ratio of 44%. So we are in a good position to further finance on the existing base, the production of our pipeline into close future. On the other hand, we have still a mix of around 50%-50% financing. That means one half of the financing part is represented by bank financing and other third-party financing, and the other part, the other half was representing by bond issue on the capital markets.

Unchanged interesting is the situation with regard to the interest rate. We have seen and we [confirm] the decline. If you compare the on average paid interest rate on financial debt from 2.01% at the end of 2018 to 1.88% for the first half 2019 and at the date of 30th June, we have achieved already, one more time, a lower on average interest rate of 1.73% by -- and on average duration of the financing of 5.6 years. Now we are still in the -- in a very interesting range, which is following the strategy of Mobimo, and we will see also clearly a window to further decrease with the on average paid interest rate when we compare the actual situation in the financing market of Switzerland. So we have a very good chance, all of you in the second half of the year, to further decline still the average rate -- paid interest rate cost on financing debts.

I would like to turn your attention on Slide #10. What you can clearly see we had recouped -- achieved a further step compared to the end of 2018 from CHF 3.1 billion. We put -- achieved CHF 3.2 billion portfolio size, mainly driven by the construction work and the investment in the pipeline for the own portfolio. And as you also can see in the table on the left-hand side that the weight of investment properties will further grow in comparison to development properties due to the fact that we are ongoing producing properties for the own portfolio and hand them over at the portfolio at the end of the construction time. Now we have actually relation of percentage of 78% investment properties and 22% development properties left as [metering] the portfolio.

The split of the rental income, we are also very comfortable about it. So the minimal aim is to achieve 30% split for each sector. So that means 30% rental income should be generated out of the residential part, 30% out of the office part and 30% out of the other commercial part of the portfolio. Actually, we are still slightly overweight of the residential part, which is representing around 39%. Actually, we are still happy about this due to the fact that it's a very stable part of the portfolio. And we are already declared at the end of last year, that we are happy to have slightly overweight for certain time also in the resi portfolio.

Now I'd like to hand back to Daniel Ducrey for the pipeline...

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [4]

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Thank you, Manuel. If we go to Slide #12 and if we have a closer look on the projects in the -- in our pipeline. It is easy to see that we have -- still have exciting projects we are working on. First of all, the projects under construction, which has a volume of CHF 250 million, are to be completed at quality, time and cost and then taken over into the investment portfolio. The Mattenhof in Kriens and the new Moxy Hotel in Lausanne are 2 new buildings that will pass into the portfolio and contribute to further increase our rental income. But we also work on the existing portfolio and identify opportunities and possibilities to develop [doorman] potential out of our existing portfolio.

Two, value and yield increasing investments in existing properties, such as the Relais 102 in Aarau, the Friesenberg in Zurich or the Avenue Edouard Dapples Communes in Lausanne, also make it possible to actively work on the inventory and realize the increase in density in the cities, which are desired from all sides. And there are plans for a further CHF 460 million investments in new and existing properties in our portfolio, and of course, we continue to work on keeping the pipeline filled with new projects.

On the next slide, still focused on the Aeschbachquartier with the expected rental income of CHF 5.1 million and the total investment of CHF 107 million, we bring a project into the investment portfolio which delivers a nice performance with 4.8% gross yield. It showcases how much quality the new assets bring in the portfolio, assets which were created by our own development department and could then be taken into the investment portfolio. They stand out clearly from the market condition, which could be observed on some transaction in the market recently.

The Aeschbachquartier was the first district to receive the DGNB certificates as a whole. This includes a functioning social space, which have been made both with the design of exterior public spaces as well as with the publicly available meeting room, which can be rented. There are over 1,000 workplaces in this area. The garage is equipped with electrical charging station, and there is a mobility offer available. Despite the very urban location, both the roof and the Aarau park are green. We meet very high requirements in terms of energy consumption and use. And as with many of our building groups, we have also invested in art. Art plays an important social role, creates identity and also inspires youth, which grows up around these objects.

Why do we do all this when you ask yourself? Because we are thinking in long terms and align our actions to long-term goals; because we are convinced that the sustainable approach in our projects improve the long-term success; because people feel permanently better in a healthy, well-balanced and well-developed environment and stay there longer and better and are also ready to bear the costs for it. And this needs -- this needs only will increase and intensify in the future.

In Kriens, Mattenhof, too, a new block is being built, and there, too, compassion and -- is combined with outdoor public space quality and good interior room design. Today, the hotel Holiday Inn is in operation, is working and works great. It also brings a great number of Asian tourists to Kriens. And the restaurant, Nooch, with -- is Asian cuisine, already opened and certainly benefits already from this client. The occupancy rate in the residential sector is around 50% and in the commercial sector 66%. And what is pleasing is that there is also a positive dynamic here. And here, too, the expected rental income of CHF 10 million with an investment of a -- volume of CHF 170 million results in a nice gross yield, which is not easy to be bought on the market.

Other projects include the hotel Moxy on Rue de la Vigie and the Grand Mont-Riond in Rue Édouard Dapples, both in Lausanne. A construction of the Moxy Hotel in the Flon is in the final rush and will be ready for -- on time for the Youth Olympic Games in January 2020, and the hotel will have opened by then. In the Flon is also the Medal Plaza from where all ceremonies are held. We expect a nice media presence and an additional booths for all retail and catering businesses in the Flon. The project in the Grand Mont-Riond is a total renovation with additional extension of the attic in apartments. As was already mentioned, this is a value-enhancing investment, which creates higher density and realizes existing potential.

This slide you have already seen. In a fast-moving time like ours, reliable prediction is not that simple. This slide was already shown to you in 2018, and we continue to use it unchanged. Between 2018 and 2020, rental income will increase by CHF 27 million, thanks to the listed projects. The first 3 projects are already in the investment portfolio. And as our half year rental income of more than CHF 60 million proves, we are on track to achieve the planned increase.

In addition to a constant volume of CHF 880 million developments for third parties, which are also all on our own and secured land plots, we have now also been able to add 2 new condominium projects in the pipeline. We still see the vision of a large part of the population to acquire condominiums in the urban and suburban area as long as the price is in the mid-section. And despite the difficult access condition for financing, the demand remains high. Thus, we are convinced that with this faster project execution times, which are characteristic of condominium projects, we can quickly offer attractive properties for sale in the market.

Here are 2 projects specifically highlighted. The first is a condominium project in Meggen, a classical, traditional product with good material and construction quality, which can be offered at an interesting price. And here, too, we see a good opportunity for rapid sales in the market. And then the project Papillon, a residential development with a part of nonprofit apartments and a part of condominiums. A few weeks ago, we received from the voters in the Municipality of Köniz the confirmation of the contract for this project. It is a land lease as it is usual in Berne and for which we have already the necessary partners on board, in particular, the nonprofit housing developer.

Now what is the outlook for the second half of 2019? What is important for us in the second half of the year? For the real estate portfolio, it is about completing projects, which are still in construction phase, and taking them over into the investment portfolio. At the same time, the marketing of these areas, these apartments or this commercial space has to be successfully completed with the utmost professionalism. We will continue to improve our portfolio qualitatively and quantitatively through developments, through purchases and through sales. Sales are considered, of course, but they shall not and will not influence the positive development and decrease of the rental income.

In the operating business, we want to realize the planned increase in rental income and continue the successful construction and development of the projects out of our pipeline. This has top priority. At the same time, a strict cost management has to be continued. We will continue the digitalization strategy and will soon be able to further increase our efficiency with additional new benefits, and we stick to our strategy. We only invest where appropriate and profitable. We continue our shareholder-friendly payout policy, and we work sustainably out of conviction and because we know that this is important to investors and the market.

We are at the end of our presentation. Thank you. We are ready now for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question now comes from Dennis de Jong from Kempen & Co.

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Dennis De Jong, Kempen & Co. N.V., Research Division - Research Analyst [2]

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I was wondering is there a new strategic update with the new CEO coming in this year.

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [3]

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Yes. And thank you for the question. No. When you come in a company, you obviously analyze what's there, what are the qualities of what you find in and that's what I did in this first 5 months. And the strategy is a very simple one. We continue to increase our rental income. We do this by adding part of our development efforts into our pipeline. And we continue, on the other hand, creating profit by selling parts of our development. It's a very sustainable and very, very long-term proved strategy, which shall not be changed in its foundation. Obviously, nuances, [accents] will be set, along with the change in the market here and there. But the strategy, as such, remains the same.

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Dennis De Jong, Kempen & Co. N.V., Research Division - Research Analyst [4]

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That's clear. Another question I had was that I saw, well, quite a big increase in the EPRA EPS. It was about 34%, I believe. What is driving this increase, if I may ask?

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Manuel Itten, Mobimo Holding AG - CFO & Member of the Executive Board [5]

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Yes. I can give you the answer properly. And due to the fact that we had this onetime particular tax impact in the first half. It was also increasing in a onetime impact to EPRA performance. So that means you can simply take CHF 1 off of this CHF 5.22 and then you are at the normalized achieved EPRA [earnings] and earnings for the first half. We are looking very -- sorry, interest, forward to the situation that we are able to see at the end of 2019 and at the end, in particular, of 2020. If you compare your outlook of the rental income, as was shown by Daniel Ducrey in one of the former slides, here, we see then we go very close to this [CHF 0.10]. Also at the level of this EPRA earnings per share due to the fact that we can further increase the rental income out of production of the pipeline and bring the properties proper and fully led to the portfolio. So we are looking forward to that situation.

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Dennis De Jong, Kempen & Co. N.V., Research Division - Research Analyst [6]

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Okay. Yes. Then my last question is a bit more into detail. Could you go through the valuation growth in more detail? I was wondering if it's fair to assume that the most value growth comes from the development because the cap rate remained at 3.4% and the rental growth like-for-like is up by 0.1 point -- percent.

And maybe as a follow-up, if I look at the net initial yield, the investment properties on Page 6, it declined by 40 bps. Is that like-for-like yield compression or a change in the quality of the portfolio?

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Manuel Itten, Mobimo Holding AG - CFO & Member of the Executive Board [7]

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So this was -- like-for-like, there was no yield compression. It was a change in the quality of the portfolio. You have -- because proceeds by different operating activities. In single room properties, it could demand further the quality of the portfolio. And that was the reason behind we (inaudible) achieved this positive result overall, additionally, in the revaluation gain. Biggest part was created by the construction of the pipeline for the own portfolio to CHF 11.7 million, and the rest was created on the existing portfolio by this micromanagement successful operating work on different properties where we could achieve a better condition and the better situation. So we have achieved this positive evaluation gain out of these operating activities. And like-for-like, as I mentioned already, that discount rate was based on the same level compared with the previous period.

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Operator [8]

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(Operator Instructions) And just to confirm that we have no further questions at this time. So ladies and gentlemen, I would now like to turn the conference back to Mr. Ducrey for any additional or closing remarks. Thank you.

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Daniel Ducrey, Mobimo Holding AG - CEO & Member of the Executive Board [9]

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Thank you, Hannah. Ladies and gentlemen, thank you for your attention, the time you have taken. I hope you liked the figures presented and the performance made. We are looking forward to see you back in 6 months latest for our full year presentation.

Thank you, and have a nice summer.

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Manuel Itten, Mobimo Holding AG - CFO & Member of the Executive Board [10]

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Thank you very much.

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Operator [11]

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Thank you, everyone. Ladies and gentlemen, that now concludes today's conference call. Thank you for your participation. You may now disconnect.