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Edited Transcript of NMAN.ST earnings conference call or presentation 17-Oct-19 8:00am GMT

Q3 2019 Nederman Holding AB Earnings Call

Oct 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Nederman Holding AB earnings conference call or presentation Thursday, October 17, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew Cusick

Nederman Holding AB (publ) - Senior VP & CFO

* Sven Kristensson

Nederman Holding AB (publ) - President, CEO & Director

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Conference Call Participants

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* Daniel Lindkvist

Handelsbanken Capital Markets AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Nederman Holding Q3 Report 2019. Today, I am pleased to present CEO, Sven Kristensson; and CFO, Matthew Cusick. (Operator Instructions)

Speakers, please begin.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [2]

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Good morning, and welcome to this session reporting Nederman interim status of Q4 (sic) [Q3] 2019.

As a summary, Nederman Group had a good quarter. We had development in line with our expectation. Both sales and orders showed organic growth, though we can say that it differs quite -- that there's quite varied portfolio between geographies and division. Europe, however, posted again a very strong quarter. And North America is interesting, 3 out of 4 divisions are doing good progress. Unfortunately, we can't say the same about Asia where we have again a weak development.

We have continued to develop and release new products, especially in the integration of digital solutions. Measurement control division are now supporting the development of new offers. We also held a Nederman Future Days in September where we invited people, our stakeholders as well as key managers from Nederman, and that was a successful event held in September here in Helsingborg.

We had some very well-reputed speakers. First of all, Robert O’Keefe opened up with the (inaudible) Health Effects Institute, a research institute located in Boston. And they have in their annual report on global air -- status of global air claim that 95% of the world population is exposed every day to poor quality of air. And furthermore, a lot of statistics about that 13% of all deaths in China are related to air pollution; and something similar, I think it's 12% in India. And even Sweden, where we believe that we are free from all of this, the (foreign language), if we've had now an English word for claim that it costs -- annual cost for bad air in Sweden is about SEK 56 billion. So again, we had an interesting start of the day.

Connie Hedegaard, who's the -- who was responsible for holding the meeting, Copenhagen meeting in 2009, she's been a European Commissioner, Environmental Minister for many years in Denmark; Anders Borg, former Minister for Finance; and Kerstin Lindell, told us about their journey in -- to become a more environmentally friendly company. But the conclusion anyway was that the industry has the solution. Even if we are part of the problem, we also have the solution. And the conclusion was the industry do not have to be part of the problem. We can take care of it if the political will and the investment will is there.

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [3]

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I'll move on to Slide 4 and go through some summary financials for the group for quarter 3 2019.

Incoming orders were SEK 965 million, up from SEK 818 million last year at Q3. That's an increase of 10%. Sales for Q3 2019 were 1 point -- SEK 1.089 billion, which currency adjusted is an increase of 22% compared to Q3 2018.

Operating profit for the quarter was SEK 77.9 million, up from SEK 53.5 million. That gave us an operating margin of 7.2% in the quarter versus 6.4% last year. Net profit increased to SEK 52.8 million from SEK 33.1 million last year. And earnings per share, SEK 1.50 from 0 -- SEK 1.5 versus SEK 0.94 in Q3 2019.

And if we move on to Slide 5 and look at for the year-to-date, so January to September 2019. Orders were SEK 3.028 billion. That's a currency-adjusted increase of 14% compared to the same period last year. Sales, SEK 3.221 billion. Currency adjusted, that's a 23% increase with the first -- compared with the first 9 months last year.

Operating profit year-to-date is SEK 234.5 million, up from SEK 185.7 million last year. That's an operating margin of 7.3% versus 7.5% for the first 9 months of 2018. Adjusted operating profit, slight -- very slightly different at SEK 235.9 million this year-to-date versus SEK 189.5 million in year-to-date 2018.

Net profit year-to-date is SEK 153.4 million, an increase from SEK 113.4 million last year. And earnings per share now at SEK 4.37 for the year-to-date versus SEK 3.23 at the same point last year.

If we then move on to Slide 6, and the first division up is Nederman Extraction & Filtration Technology, and over to you, Sven.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [4]

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Yes. Nederman Extraction & Filtration Technology, their main brand that if you remember in earlier presentation is that they go to market under the brand Nederman and are mainly focused on distribution and smaller systems, the wood, welding, composite, et cetera, just to recap. They continue their very positive development with strong organic growth in both orders and sales, and they continue to strengthen their profitability, especially the European market showed strength. We are growing our positions in Germany, Nordic, U.K., very strong.

Then of course, in -- I shouldn't say [awful], but Southern Europe were not as strong. Americas, we had a very strong development in U.S. Canada has come back a little bit. And Brazil is also bouncing back from a few years of difficulties. Then we come to Asia where we had significant -- we are not doing as good as we should in that area. So for this division, Europe is very strong. Americas showed -- continues in positive development. And Asia, if we want to take geographies, are still very weak.

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [5]

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We take a brief summary of the financials that you see at the bottom. Incoming orders of SEK 495 million in the quarter, SEK 485 million in sales with some slight backlog build there. Adjusted EBITA SEK 61.2 million and the margin net, 12.6% for the quarter.

If we move on to now Slide 7 and talk about Nederman Process Technology.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [6]

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Yes. Nederman Process Technology is handling mainly larger projects, heavier industrial, metal recovery, smelters, foundries, chemical industries, et cetera. Stable sales, but order intake a bit weaker. There is still uncertainty in large investment. The longer -- the sort of small, medium-sized are doing quite okay, especially in Europe where we also have seen some good medium, mid-sized and large orders coming in. But in U.S. and the close neighbors, Canada and Mexico, we've seen a continuous sort of hesitance to take on larger assignments. And again, the Asian market is a bit weak, especially in Asia.

Especially focused on what we will see is that the textile segment is characterized by 2 things. There is a bit of an overcapacity, but it's also a bit uncertainty where to place new capacity. It has to do with different things. It has to do with the energy capability. And for Southern Sweden, a well-known fact that supply of power is an important thing, and that is definitely (inaudible). It's also about the trade war where there are big discussions, where to place the new fiber manufacturing? Should it continue to be China? Should it be U.S.? Or are there other alternatives? We can see that there's a continuous hesitation in this area, which you can also think -- see it from one of our partners, [Latour], the leader in fiber manufacturer -- leading fiber manufacturer, the machines for fiber manufacturing, a Swiss company, also listed [LATOB], that claim that they see the same -- have the same issues.

But again, overall, sales stable, but we need to land some orders, and we have -- had at the beginning of this quarter also in some European countries and there are probably more to come.

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [7]

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If we take the figures for Process Technology division for the quarter, orders for the quarter -- received for the quarter, SEK 281 million; sales, SEK 419 million. So we've seen that some of the backlog has been consumed at [last united, ex dollars], as Sven has mentioned already. Adjusted EBITA at SEK 21.5 million, it's 5.1% for the quarter.

Moving on to Duct & Filter Technology.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [8]

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Duct & Filter Technology, that's where we supply ductwork and filters that are placed into the blue boxes you see. We performed well in the quarter. Overall growth in orders received and sales, but again, difficulties in Asia.

For Nordfab, which is a brand that trade duct, we have invested in a new sales [organization and broadened] network, and this will and has continued to lead to improvement both in Americas and EMEA. We have seen that we have been -- there have been more -- a bit more large orders, and that is also internally with the success for the sister division in wood. And that had a slight deterioration on this very, very good gross profit margin.

Menardi that sells filters, a slightly weaker development, and that is the first fit that goes in with large installations. And if projects are postponed, it will also hampers our growth. The day-to-day business, which is more of a repeat business and a replacement business, we're doing okay. And we can also see that EMEA was doing very well in the quarter.

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [9]

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Figures for Duct & Filter Technology for quarter 3. External order intake, SEK 135.4 million. The sales were SEK 154.7 million. You should note that some sales in this division didn't go, as Sven already mentioned, to our other divisions in the group. Adjusted EBITA for this division is SEK 21 million for quarter 3, and that's a margin of 13.6% of sales.

Moving on to the fourth and final division in this presentation, Nederman Monitoring & Control Technology on Slide 9.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [10]

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Yes, slightly weak orders received during Q3, and that it comes all from the U.S. market. But we have upgraded Nederman Insight, the digital platform, and it now covers a large part of Nederman customer segments.

We have developed what we call the Smartbox which is the, yes, heart and brain of the system and that we can then address a wide range of system requirements. It was launched internally mainly in September and it will be released to the market later this year.

We have also developed a new filter system from Nederman Extraction & Filtration Technology, which includes -- we'll make it what we call a future proof. It has all the combination of a digital solution, IoT platforms and all of that. And that can help the customers report regulatory compliance. It's also giving all kinds of benefits like warning signals, predictive maintenance and whatever. This new filter range will be launched to the public in FabTech in November -- mid-November in Chicago. And later in the year, we will start selling it and distribute it to the market.

There are further development of the NEO Monitors in the U.S. market. We have a good position in China for NEO and in Europe, whereas we had a weak position in U.S. We have started the process of increase our capabilities significant in that region.

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [11]

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If we take financials for the quarter 3 for Monitoring & Control Technology. Orders -- external orders received were SEK 54.2 million; sales were SEK 56.2 million; adjusted EBITA, SEK 1.5 million; and a margin of 2.7%.

Moving on to Slide 10 where we see the financials for the consolidated financials for the regions. This is one of the last [quarters] so be showing this, but I won't go through every single number on this slide. There's a lot of numbers on here. What is quite apparent is if we look at the organic -- the currency-neutral and organic growth, we see that there is rather strong growth in EMEA still, both for the quarter and the year-to-date, 4.9% in the quarter in orders and 7.4% for the year-to-date.

Whereas U.S. in the quarter was rather flat, minus 1.5%. That's a reduction of potentially one -- like we said before, one large Process Technology order can make that number positive or negative. However, there is a clear trend in APAC on the organic growth that continues, albeit slightly less deterioration in quarter 3 compared to earlier in the year.

Moving on to Slide 11, we can see that the cash flow from operations in the Q3, as I previously hinted that Q3 and Q4 are our stronger quarters for cash flow development. A lot of the cash flow development for Nederman Group is dependent on the timing of orders and where we are in specific projects. But quarter 3 was a good quarter for us, and we are now year-to-date at SEK 116 million positive cash flow from operations.

Moving on to Slide 12 where we see net debt. Cash flow -- a good cash flow from operations, obviously. I mean this -- we see this blue bar with the net -- for the net debt, excluding pension schemes, have actually come down a little bit. What you also -- you'll see on account beside of that is the post-employment benefits that have increased reasonably significantly in the quarter. This is due to revaluation of actuarial recalculations of the pension scheme liabilities and reduced discounting factors, if you want some technical words in there as well.

If I move on then to Slide 13 and let Sven summarize the quarter.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [12]

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Yes. If we summarize, the Extraction & Filtration Technology, good organic growth and improved profitability, increased digital sales, meaning both from our Partner Web Shop where we are using more and more of the modern technologies and that way controlling the distribution.

Process Technology, continued hesitancy on large investment decision, significantly improved profitability. Duct & Filter Technology, growth in U.S. and EMEA. Monitoring & Control Technology, new release continue to flow out from that division and that will, as we see beginning next year, give us some further boost in the market.

Nederman Group, organic growth in both incoming orders and sales; and what is most important, improved profitability with an earnings per share at SEK 1.50.

If we then go to the outlook. As all of you have seen, there are some turmoil around the world. So if we formulate it like this, many of Nederman's markets show continued uncertainty. The ongoing trade conflicts, financial uncertainty prolong decisions on large investments and large projects are postponed. Despite these geopolitical challenges, Nederman has a cautiously optimistic basic outlook. Environmental issues will continue to be important for the group's customers, and Nederman has strengthened its position in many crucial areas where future growth is expected to be.

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [13]

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On to Slide 15, other information Sven. I can actually give you the Nomination Committee update. This is in the quarterly report as well. As we've announced, as approved by the AGM, we have appointed 4 members for the -- the following 4 members have been appointed to the Nomination Committee: Anders Mörck from Latour, Claes Murander from Lannebo Fonder, Henrik Forsberg Schoultz from Ernström & Co and Fredrik Ahlin from IF.

Johan Hjertonsson is a co-opted member of the committee. And any questions on the Nomination Committee, they can be directed to anders.morck@latour.se.

We've got one organizational change that's been announced, Sven, during the quarter as well. Maybe you can take that one.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [14]

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Yes. Aage Snorgaard has left his position during the quarter. And for the time being, where we have the recruitment process ongoing to find a successor, I will head up the division until further notice.

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [15]

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Slide 16 is the financial calendar for 2019 and the first part of 2020. The year-end report will be published on February 14, 2020. Q1 report will come out on April 21, and the interim report will be on -- interim report for the half year will be on July 14.

That's the last slide in our presentation, so we can now open up for any questions from those listening.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Daniel Lindkvist from Handelsbanken.

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Daniel Lindkvist, Handelsbanken Capital Markets AB, Research Division - Research Analyst [2]

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So congratulations on a stable report and a normalization in the -- compared to last year. I'm a little bit still stuck in the old geographical structure, so my questions will be colored by that. But just looking at the conversion of the order book, I find it high this quarter both in EMEA and APAC. So how should we view the order book going forward?

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [3]

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Yes. APAC, if we take APAC first where that is most apparent. APAC, the majority of the consumption of orders in the quarter is related to the textile segment, as we have highlighted there, they have this overcapacity, and that is something that is not just a one-off quarter. There is a current trend on that. But as Sven mentioned, we work, for example, very closely with a Swiss-listed company called Rieter. They show a very similar trend. The important thing there for us is, of course, we need to deliver our projects profitably, but we will not -- we don't want to get dragged in. We've got to be very careful with our margins, and we will continue to keep a very close eye on those.

We have, for example, had opportunities to take large orders at rather low or very low gross profit margins that we have, in fact, rejected. Rather than taking turnover, we are looking at profitability. And I think that's very important for Process Technology in APAC and also a little bit in Americas where we have seen an improvement in profitability in Process Technology there, too.

In Europe, there is not -- we have not seen -- it's not such a major decrease in the backlog. And for the time being, we're not seeing -- I think you might have been hinting towards the next question might come about the German car industry. But we've not seen a major impact from their demand order intake so far from this reduction in output from the German and German-related car industry.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [4]

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The fact is that the German car industry has not invested heavily over the last few years, and they have the -- there has been some foundries investment when they've gone to new technology because you have higher temperatures in the (inaudible) you need to go to some. But it's not being a massive investments in the half in the -- but of course -- and we are not so exposed to it. If you had asked me 4 years ago, I would be disappointed because we were not so exposed to German car industry because there are some local competition that has that position. Today, maybe we are more happy than they are at the moment.

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Daniel Lindkvist, Handelsbanken Capital Markets AB, Research Division - Research Analyst [5]

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Okay. No, so I'm just trying to get my numbers together. So I just find the profitability in EMEA surprisingly strong, while I would have expected that the sales level is a bit higher profitability in the Americas. So just trying to figure it out then. And in this parcel, where does the louver business sit in with, I mean, the seasonal variations with that business? And it seems like it was profitable -- more profitable than expected in EMEA in the quarter. So could you comment on that?

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [6]

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If we take EMEA and the profitability in the quarter, what we have got in EMEA is we are still relatively -- if you talk the share of our EMEA business, the largest portion of our EMEA business remains to come from Extraction & Filtration Technology division. And they have had a very strong quarter and year-to-date in that division, particularly in Europe. So they are perhaps the main driving contributor to the increased margin in EMEA, but we do get some positive contribution from there.

We also have NEO Monitors in EMEA as well. However, of course, we had NEO Monitors last year. And you might know, when you look at the -- notice when you look at the Monitoring & Control Technology division, Norwegian companies are not -- the Q3 for Norwegian companies is not usually their most productive quarter due to holiday period. It does have an effect for us there.

But the simple answer is EMEA has done very well. Extraction & Filtration Technology and louver is in line with expectations there. Whereas APAC, we have been hit by -- our louvers are continuing to sell, but you see in the backlog being eaten there quite significantly now if you take the year-to-date figures particularly.

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Daniel Lindkvist, Handelsbanken Capital Markets AB, Research Division - Research Analyst [7]

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Yes. And then just looking at the Americas then, I would have expected a slightly higher profitability given the sales level you are at in this quarter. Could you just comment on that?

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [8]

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Yes. The sales -- the profitability in Americas -- or in Americas, we have the reverse, perhaps, if we take -- if we split it between the divisions. Again, Extraction & Filtration Technology have a much smaller percentage of our American market. Process Technology have a larger chunk there, and therefore, the increased sales don't necessarily come with the -- at least a very high gross profit -- or the higher gross profit margin that you see in Extraction & Filtration Technology and also in Duct & Filter.

So it is a -- after mix, it sounds -- it's taken as a cop-out, but it is the fact that there is a change in mix in Americas with the more Process Technology and the rather flat or slight increases in the other 2 divisions we operate there, Duct & Filter and -- the other 2 main divisions there, Duct & Filter and Extraction & Filtration.

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Daniel Lindkvist, Handelsbanken Capital Markets AB, Research Division - Research Analyst [9]

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Okay. So just a mix effect basically in the U.S. business then?

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Matthew Cusick, Nederman Holding AB (publ) - Senior VP & CFO [10]

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Yes. It's not a -- you can take it division by division in that region. There's not a significant deviation in margin in any of the divisions.

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Daniel Lindkvist, Handelsbanken Capital Markets AB, Research Division - Research Analyst [11]

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No. So -- and just my last question. I mean everyone is discussing the project business and the activity in that area. Have you seen any differences in the activity? If you look at the beginning of the quarter and the end of the quarter, has it increased? And what could you say about that?

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [12]

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I would say that's not a big difference. To the conference, we have seen and we are probably landing some orders, especially in Europe, during this quarter, hopefully. And I wouldn't say that there is a bigger deviation there in the beginning or in the end there. I think certain more -- a little bit more of the year-end activity that you normally see.

Where you see it is rather in businesses like [fixed side] that is very dependent on the trade between -- the complex trade between Asia, U.S., Europe sanctions in a number of countries where you have a more complex structure that sort of make -- the decisions make us weary. Where should we go? And even in some more -- going back to the words of The Clash, should I stay or should I go now? And that means we'll sign those especially where you have a lot of these, et cetera.

So it's more -- I think it's more dependent also on the different types of the applications and businesses. [Take Phase 1], you have some others where you have large investments that has been constrained. If you look at steel, for instance, that the trade discussions, potentially, you should see investments in U.S. where they have undercapacity, or overcapacity you see in China. But again, the trade war, what will be the rules in a few weeks from now? That we'll see as sort of prolonging the discussions rather than saying, yes, we do.

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Daniel Lindkvist, Handelsbanken Capital Markets AB, Research Division - Research Analyst [13]

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Okay. Great. So I think...

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [14]

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That is our opinion of an assessment of that situation.

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Operator [15]

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(Operator Instructions) And we seem to have no questions at this point, so I will hand the word back to the speakers for any final comments.

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Sven Kristensson, Nederman Holding AB (publ) - President, CEO & Director [16]

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Then we thank you for taking the time listening, and have a continued good day. Thank you very much.

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Operator [17]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.