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Edited Transcript of MRN.PA earnings conference call or presentation 31-Jul-19 8:00am GMT

Half Year 2019 Mersen SA Earnings Call

PARIS LA DEFENSE CEDEX Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Mersen SA earnings conference call or presentation Wednesday, July 31, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Luc Themelin

Mersen S.A. - CEO

* Thomas Baumgartner

Mersen S.A. - CFO and Group VP of Finance & Administration

* Véronique Boca

Mersen S.A. - VP - Communication

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Conference Call Participants

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* Jean-Francois Granjon

ODDO BHF Corporate & Markets, Research Division - Analyst

* Martin Boeris

Exane BNP Paribas, Research Division - Analyst of French Mid Caps

* Stephen Benhamou

Societe De Bourse Gilbert Dupont, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Mersen's presentation of its half year results for 2019. We'll have Luc Themelin and Thomas Baumgartner.

And I hand over to Véronique Boca to start.

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Véronique Boca, Mersen S.A. - VP - Communication [2]

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[Interpreted] Welcome, everyone, to the presentation of our half year results. I'd like to let you know that the press release and today's presentation and the reports are available on the group's website. After the presentation, Luc Themelin and Thomas Baumgartner will take your questions. So Thomas?

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Thomas Baumgartner, Mersen S.A. - CFO and Group VP of Finance & Administration [3]

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[Interpreted] Hello, everyone. And welcome, everyone, and we're delighted to comment on Mersen's very positive results. This is, in fact, our 10th consecutive quarter of organic growth in sales and its seventh consecutive half year of growth in operating income.

So I would like to point out that my comments are on the results before implementation of the IFRS 16 standard, but the impact is positive, particularly on EBITDA and also on our operating margin. And you will find the main impacts presented in the appendices of the presentation.

So let's take a closer look at the key figures. All of our financial indicators are positive, with the sales up about 6.5%. And with regard to operating margin, gaining 30 points. Now our cash flow from operations has improved by EUR 2 million, standing at EUR 20 million for the half year.

Now let's take a closer look at certain elements, starting with sales. We have EUR 448 million (sic) [EUR 484 million] in sales, which is like-for-like growth of 6.5%. All of the geographic zones saw growth during the half year, particularly in North America, with 10% like-for-like, and business was particularly vibrant in electronics and process industries.

Europe also saw sustained growth of 6% where the trends are positive, especially in Advanced Materials on the electronics and chemicals markets. In Asia, growth was more moderate at 2% this half year. The chemicals market was dynamic, just as in electronics. However, as expected, the solar market contracted, which has been the case since fourth quarter 2018, but coming from a high basis of comparison.

So I told you, we had 12% growth. We had a positive effect of the appreciation of the dollar. And in the second half of the semester, the effect should be more limited. The dollar is coming back down to the level of the second half year of 2018. And then we have the acquisitions, which were consolidated at the end of 2018.

Let's look at the results now. So you can see that margin is up. We saw particularly good growth in volume. Our 2 segments had a positive price impact, so which offset the rises in raw materials as well as higher customs duties. There was work to improve productivity. This helped offset for inflation. And the group absorbed other unfavorable elements in particular, setting aside additional resources to keep pace with growth in certain markets and some scope effects, but I will come back to that.

So let's look at profitability per division, starting with Electrical Power. Here, margin -- the margin was 9.7% for the first half of the year compared to 10.2% last year. That drop can be explained by 2 factors. First of all, a negative volume mix effect. The growth rate was slightly down in organic terms and, in particular, on the American electrical distribution market where margins are higher. The second factor was the dilutive effect of acquisitions. So the acquired companies, FTCap and Idealec, have margins that are lower than the rest of the division, and they were mostly consolidated in the second half of last year. So this explains 0.3% of the margin. These effects were partly offset by price increases, as I mentioned earlier. You'll remember that pricing trends were less positive last year. Overall, operating income before nonrecurring items grew by 3% in value.

As for Advanced Materials, we saw a 60-point gain in operating margin, coming in at nearly 15%. This was thanks to high volumes of business and a positive price effect that offset a rising cost of the material cost and customs duties that I just mentioned. And operating income for nonrecurring items grew 20% in value for the division.

Now let's look at net income growth to 16%. This includes nonrecurring expenses of EUR 3 million, which is some of the restructuring costs, litigation costs and the cost of acquisitions. Financial expenses were in line with last year and the tax rate of 24% since 2018. As you know, Mersen has benefited from the U.S. tax reforms, and there is also a better utilization of our Chinese tax situations. So improvements there.

Now let's look at cash flow. So before investments, there's improvement here by EUR 2 million. And I'd like to remind you that it is always higher at this time of year due to a seasonal effect. This also includes a significant rise in working capital requirements linked to growth in the business and the seasonal effects. And WCR reaches -- it peaks at the end of June. So it was at 24.7% due to a few one-off elements. First of all, we recorded more late payments than usual at the closing of June due to certain OEMs, which I won't name, but they wound up paying their bills in July. Also, we increased our stock of strategic materials in late 2018, which we began paying in early 2019. This was in light of price pressures. Now, there is no more reason to be constituting such inventories. And so this will be drawn down in the second half of the year.

So now as for the debt service to the EUR 228 million, this is up EUR 12 million, including EUR 7 million for the acquisitions, particularly for the Columbia site, which Luc will explain to you; and there's -- there are investments for $21 million. The investments will be higher in the second half of the year, but operational cash flow before investments will also be higher.

So our financial structure remains very solid, with a net debt-to-EBITDA at 1.5 and gearing of 41%. Still on the financial structure, our financing is balanced with long-term maturities. We secured a Schuldschein loan in the first half of the year, which allowed us to extend our loan maturities and increase our available credit lines now to nearly EUR 200 million, which is abundantly sufficient to refinance the U.S. private placements upon maturity in November. And this leaves us all the flexibility we need to keep pace with future growth.

So now I will hand over to Luc, who will talk about outlook for the year.

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Luc Themelin, Mersen S.A. - CEO [4]

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[Interpreted] Hello, everyone. So let's look at just a few highlights and outlook for the rest of the year, and I'll talk about our investment program, which is rather ambitious. I'll talk to you about the Columbia acquisition and I'll give you a bit of news of what's going on, what we're doing in electric vehicles and I'll say a bit about that market, which remains dynamic. And also after what Thomas has just said, we will be raising our guidance, particularly as concerns sales.

So if we look at CapEx, well, you saw this at the beginning of the year already. So we are confirming that a large part of this program, well, more than half is for growth purposes. And it's -- and you'll see that nearly half is for the silicon carbide semiconductor market, which is very, very closely related to the electric vehicles market. So there's big program there for investment to prepare for 2020, 2021. And through 2021 for power electronics and SiC semiconductors. Then in solar as well, we are preparing for the growth of our joint venture in China for components. In the power electronics, we've got a specific program for our cooling products, which is developing quite nicely. And we have some of our R&D teams working for battery protection systems for electric vehicles and some interesting niches on the laser mirrors. And then, of course, there's a recurring maintenance CapEx to keep all of our equipment up to date.

So coming back to the Columbia site, I'll give you a bit of background here. In fact, we bought a former site of a competitor known as Graftech, who got out of the specialty graphite business some time ago. So we bought one of their sites where there was capacity for production, which was readily available, particularly for isostatic graphite. They invested a bit later than we did, and they never used that capacity, in fact. So that site in -- would allow -- without investing too much, will allow us to produce 2,000 tonnes of graphite. Then there's also an extruded graphite equipment as well, which is -- currently, we buy that product elsewhere. So it's always better for us to produce it ourselves. So this was an excellent opportunity. So that was the idea behind this acquisition. This will resolve some of our issues with meeting the need for higher capacity in isostatic graphite. So this plant will be able to provide us with additional capacity.

In isostatic graphite, we're at 12,000 tonnes, theoretically, between the U.S. and China production, but we're at 90% to 95% capacity. So we feel that we will be needing additional capacity by early 2021. So it's not -- it won't be too complicated to get the production up and running, and we'll be able to adapt it to the market. As I said, this will be coming from the solar market even though we are not aiming to go beyond a certain capacity, but we really do want to be able to follow the market for the silicon carbide semiconductors. We expect to see a good growth and then beyond 2023, as well. We will be able to do as we please and go beyond even the 2,000 tonnes that are currently talked about in Columbia.

Here, you can see the time line. So about a EUR 5 million to get things up and running. We'll have all of 2020 for retesting all the processes. And to get the extruded graphite production line is going to take time and testing to do. But by early 2021, we should be able to get started, at least with the extruded graphite. And then we'll see, according to demand, what we need to do in terms of the isostatic graphite. So it's a very good opportunity. This kind of thing doesn't come around often. So we were happy to have this opportunity, and it will resolve some of our concerns about capacity.

Let me say a few words about electric vehicles to start with. Well, since the beginning of the year, we've had a lot of projects and talks and discussions with a lot of manufacturers. Many manufacturers work on all types of vehicles, be it ordinary automobiles to heavy-duty work site vehicles, mining vehicles, electric buses, which are already running in the Paris region, for example. So we have a whole range of products that we've been delivering for the past 2 or 3 years, and that's about 80% of our growth there. And we expect to see more growth for private cars.

The good news is we've been selected by a major manufacturer for our hybrid current switches. So if everything goes well with the sampling and certification, we will be producing in 2021 for this manufacturer. So we are headed for success with those products. And we're working with others, with Volkswagen where we had stopped for a while, because they were changing their product. And then there's a lot of fuse products for this sector as well. And we expect to see some good growth in 2021. So all carmakers are moving forward with their programs. And this is why a CapEx in silicon carbide semiconductors is so important for this business as well.

So our market environment hasn't changed much since the last time we spoke. As I've said, there's been some good progress in renewables, but in particular, as I said, well, in semiconductors -- well, demand for silicon semiconductors, the traditional ones, are down slightly, but this is where we expect to be able to pick up with the silicon carbide semiconductors. In wind power, nothing new. In solar power, there are some things that we had forecast. China is picking up its production more now, so we expect to see a good rebound in solar. But this is why Asia growth was not so good, because there weren't many new orders in China. So we've got a lot of requests in the Chemical business, requests for proposals. So that's looking promising. And once again, we're working on capacity for the SiC semicon market.

So guidance. So we have raised, as you can see, going -- for sales, we had said between 2% and 5%. We're are now -- our guidance, we put it at 4% to 5% organic growth. And in CapEx, we've added EUR 5 million for Columbia, in particular. So we went from a bracket of $60 million to $70 million for CapEx going to $65 million to $75 million. So it's an ambitious program, but it's going to be tight. There are a lot of industrial projects that we're developing at the same time.

So just to conclude, a few points. I think it's -- as you know, we have a real advantage of being very local. We are present where our customers are located. So this helps with customs duties issues. We're also leading a very sustained project on sales efficiency. We're working on more competitiveness. We've mobilized a lot of people on the sales side as well to be able to follow through or to keep pace with the electric vehicle developments and competitiveness. While this is a constant for us, we're focusing on certain specific products and certain geographic areas in particular. And then for our growth markets, we're well positioned for renewables, wind and solar, even though we said we don't want to go too fast with the -- in our preparations for solar, but we do need to be positioned for when that market recovers. Electric vehicles and aeronautics, working very, very well and which is driving up our presence on transport markets.

So there you have it from me. So now we will take your questions if you have any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question, Jean-Francois Granjon of ODDO BHF.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division - Analyst [2]

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[Interpreted] I have several questions. First of all, could you go back to the business in Asia? It looks like there's a slight contraction in the second quarter. Could you say a bit more about that and for the trends?

Secondly, could you say more about graphite prices? And third, you talked about an unfavorable volume price mix to explain the margins. Could you say a bit more about that? And what are some of the FX trends you expect? Then the Columbia, is this going to be booked for 2020? Or will there be more investments, sorry, in 2020? And are you feeling any slowdown at all in the macro environment?

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Unidentified Company Representative, [3]

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[Interpreted] Okay. For Asia, no, we're not seeing a contraction, but we did do a lot of deliveries in the Chemicals market in the first quarter, a lot more than second quarter. And also, the Solar business was much stronger. So it's more a basis of comparison that we're talking about here rather than a downward trend.

Then prices, well, with -- we raised our prices in both divisions. So it's not just graphite. And we've -- but we did raise prices more than in Electrical Power. So over -- it's 1.6% increase in prices for both divisions, but more particularly in Advanced Materials.

As concerns the volume mix, I'm not sure what more you want to know about that.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division - Analyst [4]

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[Interpreted] Well, I would like to know the composition of that negative mix. And is it something you expect to see continue?

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Unidentified Company Representative, [5]

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[Interpreted] Okay. Well, as concerns the mix, this is particularly tied to electrical distribution, and it's difficult to forecast over time. So our guidance is taking into account this current situation, but we can't be sure that it will continue. What we can say about volume is that in power electronics, this had been quite high in the first half of 2018. And so the basis of comparison is high. But all things being equal, if we look at Electrical Power, we should have an easier second half of the year. But that's if all things remain stable.

So you had a question about Columbia and the CapEx there? We said EUR 15 million to EUR 20 million. Well, we're going to start by spending EUR 5 million this year to get the plant, the existing equipment back up and running. It's probably EUR 10 million next year to get the extruded graphite equipment producing again. This could be postponed. Anyway, we'll have a certain flexibility there. But it's rather standard levels, so we have typical levels of CapEx. We may not go all the way to the EUR 75 million at the upper bracket that we mentioned. Also, we said we've been investing not only this year, but also next year in the silicon carbide semiconductors. So there will be higher investments there than previously for that particular product.

In terms of the macro environment, we don't expect to be lowering our CapEx. You -- well, we -- as you know, we -- of course, we look at what's going on amongst our customers. It's a rather fragmented market, and we -- and just -- at our level, a difference from quarter-to-quarter isn't that meaningful. In fact, for us, the trends are heading in the right direction. We expect Solar to be picking up again. The silicon carbide semiconductor is rising and the electric vehicle market as well.

In the U.S., things are still going well. Okay, we're not seeing the same kind of growth that we have seen at times in the past, but no particular concerns there. And Europe, well, is always more complicated. We have a lot of OEMs here, but yes, again, a bit down from the first quarter, but it's not meaningful for such a short term. It's true that in the U.S., growth rates have been very -- are high at 10%, and they were high last year. So if you look at other corporations, if you look at the macroeconomic indicators, well, we -- things look fine. This is why we raised our guidance to 4%, 5%. And for our markets, if there's less Chemical Industry business, but more Power Electronics than the...

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division - Analyst [6]

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[Interpreted] Well, coming back to my question. Okay, I know the basis of comparison was high, but I'm asking if this is really just a reference effect or if some markets are heading down.

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Unidentified Company Representative, [7]

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[Interpreted] Overall, we are anticipating certain markets. It's true for us. We are sure that certain markets will have to rise, but it's not as if we have spies here and there, not at all. This is the feeling. This is what we are getting -- this is the message we are getting from the field and we're anticipating.

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Operator [8]

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(Operator Instructions) We have a question in English. The next question in English is from Martin Boeris from Exane.

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Martin Boeris, Exane BNP Paribas, Research Division - Analyst of French Mid Caps [9]

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First of all, in Electrical Power, you talked about fewer projects there and there was -- what types of projects? Are you talking about the (inaudible) decline? And more about solar, please and recovering -- so you expect to see that rise. And you were stable in the second half of the year. And then the Chemicals business, where margins are lower. Can we expect to see any change there?

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Unidentified Company Representative, [10]

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[Interpreted] All right. Well, so your first question about Electrical Power, sorry, we didn't hear you entirely. I'm going to try to answer your second and third questions. So well, let's start with the Chemical business. Yes, we have lower margins, but that was quite some time ago. Our margins have greatly improved. In fact, they're a bit below the average for the group, but this was the aim of a lot of the restructuring 2 years ago.

As concerns the Solar business, for the second half of the year, we expect to see this much better than the first half of the year, but we expect this to remain full at the end of the year or maybe just slightly below the previous year. So as -- the second half of the year will compensate for a low first half of the year in Solar.

If you wouldn't mind, please, asking your question again about Electrical Power.

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Martin Boeris, Exane BNP Paribas, Research Division - Analyst of French Mid Caps [11]

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[Interpreted] So about Electrical Power, you said there were a few projects in power electronics, which explains the drop in sales. I was wondering if there were -- if you could tell me what those particular projects are.

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Unidentified Company Representative, [12]

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[Interpreted] Well, these are contracts, in fact, all with Siemens, in particular, for high-voltage products. And so a couple of years is not very high contracts. So that explains some of the drop there and some smaller contracts. But in fact, the -- it is -- they will be picking up again, because this customer is a big customer. They go through cycles. It will be picking up again in 2020.

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Operator [13]

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We don't have any further question by English. (Operator Instructions) We don't have any further question in English.

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Unidentified Company Representative, [14]

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[Interpreted] All right. Let's see if there are any more questions. Two more. So Stephen Benhamou.

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Stephen Benhamou, Societe De Bourse Gilbert Dupont, Research Division - Financial Analyst [15]

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[Interpreted] Thank you for the presentation. I would like to understand a bit more about your increases in capacity in the extruded and isostatic graphite and what are the underlying markets there.

Second question, you talked about 2 different technologies in your presentations in November on the semiconductors. So the -- is it the monocrystal or polycrystal capacity that you're aiming for?

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Unidentified Company Representative, [16]

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[Interpreted] So there's a lot more graphite used in the mono. So if that continues to grow, we'll be able to use some of the tonnes produced at Columbia. But what we really want Columbia for is for graphite for the silicon carbide semiconductors. That's the technology that demands a lot of graphite, including rigid felts. So that's -- we really want the Columbia [side].

So I'm not getting too technical between extruded and the isostatic. One is an isostatic for us and produces a very perfect product, whereas the other is -- uses an extrusion process with lesser qualities, but it is very much used in the process industries, the Chemical business and where we've got a good business. But in fact, we're having to buy a lot of that graphite. And so we need to take back control of that production and of the qualities of those projects. So this -- those products. So this will really open up more possibilities for us and we'll gain back control over the formulation and production.

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Operator [17]

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Next question. Jean-Francois Granjon with ODDO.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division - Analyst [18]

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[Interpreted] I'd like to know more about Solar, the sales in the first half of the year?

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Unidentified Company Representative, [19]

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[Interpreted] EUR 25.5 million for the first half of the year in Solar.

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Operator [20]

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We have another question that's on the line.

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Unidentified Analyst, [21]

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[Interpreted] I have a question about an investigation in India. So have you already been contacted by the Indian authorities? And could you talk about any impact that might have?

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Unidentified Company Representative, [22]

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[Interpreted] Yes, there's an investigation underway in India. We and a competitor, in fact, are being investigated for collusion on prices. So we can't say anything at this point, of course. But of course, we are cooperating with the Indian authorities. This only concerns India. We -- but there could be fines, which we don't expect to be very high, rather insignificant at the group level.

Also obviously, we have compliance programs in place, very strong compliance rules in place. So regardless of the outcome of the investigation, we will, of course, be doing more training and awareness raising on the issues of compliance.

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Operator [23]

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(Operator Instructions) Apparently, we have no more questions. Wait a minute. No. Jean-Francois (inaudible). Mr. (inaudible). (foreign language) Sorry. Jean-Francois (foreign language).

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Unidentified Analyst, [24]

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[Interpreted] I have a question about external growth. So you talked to us about Columbia. Can you tell us about any other external growth projects in the quarters to come?

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Unidentified Company Representative, [25]

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[Interpreted] Well, often we can't say anything about the [said] projects until they are more -- further along in the discussions. We -- but we are working on 2 or 3 projects. But until, well, we are closer to the goal, well, we can't really say much. But we do have 2 or 3 targets of a rather typical size for us. So we did have a fine year. I mean -- but we always have plenty of ideas for other acquisitions.

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Operator [26]

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(Operator Instructions) Apparently, there are no further questions.

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Unidentified Company Representative, [27]

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[Interpreted] Well then, thank you, everyone, for joining us for this phone conference. So the next, and [that's all] we will have the third quarter announcements on 29th of October after trading. Thank you, everyone. And please, and I hope you have a good holiday. Thank you.

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Operator [28]

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Ladies and gentlemen, that's the end of our conference. Thank you for joining us, and now you can disconnect. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]