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Edited Transcript of NOLA B.ST earnings conference call or presentation 18-Jul-19 1:00pm GMT

Q2 2019 Nolato AB Earnings Call

TOREKOV Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Nolato AB earnings conference call or presentation Thursday, July 18, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christer Wahlquist

Nolato AB (publ) - President & CEO

* Per-Ola Holmström

Nolato AB (publ) - Executive VP & CFO

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Conference Call Participants

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* Carl Ragnerstam

Nordea Markets, Research Division - Analyst

* Dhiren Arunkumar Joshi

Stockviews, Ltd. - Analyst

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

* Oskar Vikström

ABG Sundal Collier Introduce - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Nolato Q2 report 2019. Today, I'm pleased to present CEO, Christer Wahlquist; and CFO, Per-Ola Holmström. (Operator Instructions)

I will now hand you over to Christer Wahlquist. Please go ahead.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [2]

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Thank you, and welcome, everybody, to the presentation of Nolato Second Quarter 2019. I will start on Page 2 with the Q2 summary for the group. And in the second quarter, we had sales that totaled close to SEK 2 billion. It was a high comparison number that was SEK 2.3 billion last year. Adjusted for currency and group structure, that means that sales decreased by 17%. We saw continuously strong performance by Medical Solutions. We saw a normalized inventory situation at Integrated Solutions. And we had inventory adjustment affecting Industrial Solutions. The profit, EBITA, decreased to SEK 233 million compared to SEK 266 million. That gave us a strong margin of 11.7 percentage. Cash flow after investments amounted to SEK 178 million, and we still have a continued solid financial position.

I'm now turning to Page 3 of the presentation. Of course, we have the Nolato Group consisting of 3 different business areas and in common for those, we have, of course, the same corporate responsibility. We use the same material technology, and we are working as solution-oriented development partners, and we share the same technology on the production equipment side. But of course, the business areas are very separated in the market segments they are addressing, but we see that we get a lot of synergies between the different areas that we are working in.

Now jumping to Page 4, starting with Medical Solutions. In second quarter, we had sales of SEK 634 million and EBITA of SEK 82 million, giving a margin of 12.9%. You can also see that, that is, again, a record for us, which we are seeing now for close to 20 years in a row.

If we then look into the figures, we had -- I'm turning to Page 5 now, we had an increase of sales of 13% but if we adjust that for currency effects, it was a strong 9% growth in Medical Solutions business area. We saw increased volumes, both within the Medical Device sector as well as in the Pharma Packaging sector, and we believe that the second half of the year will be in line with last year. Last -- in Q3 last year, we had some extra sales or extraordinary things of SEK 35 million, so that's why we are having a little bit of that comparison. We see a strong long-term growth, and we have the ambition to grow this faster than the market, but in some single quarters, we could have a little bit less than that. The margin ended up at 12.9%, as I said, sustainable healthy margins. We have our main project activities within the autoinjectors, the insulin products and incontinence products. The production capacity that we have increased is completely according to plan.

Now turning to Page 6, you see the 2 different parts of the business area: the Medical Device, which is the larger portion and that is working mainly then with things that are helping you to have a healthy situation with active devices; and then we have the Pharma Packaging side, which is mostly containers, for drugs, for solid or liquid drugs.

Turning into Integrated Solutions on Page 7, we had sales in this quarter of SEK 821 million, an EBITA of SEK 107 million, giving a margin -- a strong margin of 13%. In this quarter, we had a very high comparison number in second quarter of 2018.

We had a decrease in sales of, if you adjust for currency, 35%. We see that the inventory situation have been normalized, which means that the high production we used to have in 2018, building stocks, is now on a normalized level. We have received orders for the new VHP models and retain a very strong position with the capital we have. We had, during the quarter, weak volumes for the mobile phones but excellent growth within the EMC business. The margin, as I said, was 13%. We have higher volume sequentially, a positive product mix and a good currency effect giving this strong margin.

Now I'm turning to Page 9, showing the 2 business segments of the Integrated Solutions. So we have the consumer electronics, consisting of mobile phones, wearables, connected Wi-Fi system and other things like that; and then we have the EMC and thermal working with the shielding solution, thermal management within electronic parts of business, all kinds of different things.

Now I'm turning to Page 10, focusing on the Industrial Solutions business area. We had a Q2 with sales of SEK 541 million, giving an EBITA of SEK 46 million and that is corresponding then to an EBITA margin of 8.5%.

Turning to Page 11. So this SEK 541 million gives a decrease of sales by 3% if we adjust for currency and group structure. We had, during this quarter, an inventory adjustment within the hygienic area, affecting volumes. The margin of 8.5% was a little bit lower than previously. We had lower volumes than we have, impact of the unsatisfactory efficiency in one of the production facilities. We see measures implemented are gradually having an effect, and we see a sequential increase of margin.

Turning to Page 12, showing the 2 parts of the business area, Industrial Solutions. So we have general industry working with general industrial companies as well as the automotives, automotive sector focusing mainly on the Scandinavian automotive markets, such as cars or heavy trucks and other things.

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [3]

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On Page 13, we summarize consolidated group numbers. Net sales of almost SEK 2 billion compared to SEK 2.3 billion. It's a decrease of 17% mainly from Integrated Solutions. Operating profit EBITA going down from SEK 266 million to SEK 233 million, which is mainly a volume effect. The EBITA margin is 11.7% compared to 11.6%, which we consider a strong margin with the lower sales. Effective tax, the tax rate at the same level as last year, if you compare on the accumulated 6 month numbers, 20.1%.

Cash flow after investments, SEK 178 million in this quarter compared to a very high SEK 352 million last year. It is a more normal level this year, and last year was very high because of extraordinary working capital effects in Q2 last year. Earnings per share is SEK 6.82 compared to SEK 7.75 last year. Net investments impacting cash flow, SEK 192 million accumulated after 6 months. It is a lower number than last year. It's more in line with the expected SEK 400 million for the full year 2019.

We have a strong balance sheet with equity/assets ratio of 47% at the end of this quarter and net financial assets of SEK 190 million at the end of June. The lease -- the effect from IFRS 16 is explained in this slide package to the meeting, but the effects are very similar to the ones after Q1.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [4]

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Okay. Now turning to Page 14, where we talk about the current situation, starting with Medical Solutions where we see a maintained growth strategy, focus a lot on the innovation side, and we have very strong customer relationships.

Within the Integrated Solutions, where we have established a position within the new product area obviously to transfer ourselves. We have a continued strong position within the EMC/thermal and working with a flexible production structure.

In the industrial sector, we have advanced our market positions. We had efficiency measures taken and gradually having an effect. We can see some indication of slowdown in the economy but stable volumes.

Now I think we are open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Carl Ragnerstam from Nordea.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [2]

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It's Carl Ragnerstam from Nordea, I have a couple of questions. First of all, what I can see, a pretty strong growth form EMC volumes in the quarter. What was behind that? And what can we expect going forward?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [3]

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I think the reason behind that is we have advanced our market position both within the telecom business area but also in the new segment that we are gradually going into.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [4]

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And can we expect strong growth going forward as well? Or was it just a one-off quarter? Or...

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Christer Wahlquist, Nolato AB (publ) - President & CEO [5]

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We have a long-term ambition within the EMC to move ourselves from previously only being in the telecom business but moving ourselves into all kinds of different areas. And of course, the reason behind that is that we are looking for long-term growth.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [6]

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Okay. Perfect. Can you perhaps comment on the seasonal variation of the tobacco-heating products? What can we expect in the second half there in terms of normalized -- you said that the levels are now normalized. Well, what is a normalized level? And if you can walk through the variations in the -- or the seasonal effect.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [7]

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Okay. Normalized volume situation means that we are expecting to have sales corresponding more to the sales of our customer, and I think that is something that we have seen now in Q2 and expect that going forward. So we will not have the big swings that -- we are not expecting that as we have had before when we have -- introducing building stocks and decreasing stocks for the customer, so more long term following the market development. And I think that's what we really mean by normalized situation. Seasonal effect, of course, we don't know everything about this market, but I don't expect any big seasonal effect within this market.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [8]

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Okay. But as far as I know, your customer will launch 2 new models where 1 is a new model, the second one is an updated model in Q4. Shouldn't we expect inventory buildup due to that? Or how should we look upon that?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [9]

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I think there -- now we have a more -- how I should say, our customers have much more knowledge about how the market develops and, of course, when switching to a new model, there will be -- you will decrease the stock of the old one and we increase stock of the new one. And I don't think we will see any big swings in that.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [10]

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Okay. And the final one, I mean, looking into Industrial Solutions, when do you expect the hygiene segment to pick up again? Can you see anything there? And will you implement further measures in order to restore margins in Industrial Solutions? Or do you expect the former measures to take back margins to more normalized levels?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [11]

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Yes. I can start with the comments about the hygiene sector. We see signs of order intake going up in the third quarter. So we expect that gradually coming back to a more normal situation.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [12]

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And regarding the measures, I think, we have put in measures, but there is a time lag to get these through, sort of get the effect on the margin side. But we expect to gradually increase more normalized margins going long term forward.

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Operator [13]

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Our next question comes from the line of Mikael Laséen from Carnegie.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [14]

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I have a question about the Integrated Solutions segment and the outlook for that for the group. Can you just elaborate a bit more on what this means, the normalized inventory situation and new products ramping up? Can we expect unchanged quarterly sales in the second half compared to the second quarter? Or you have the guidance before and you are not saying anything right now, but if you can maybe elaborate a bit on the outlook, please.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [15]

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Yes. To start with the last part of your question about the guidance, we had guidance because we saw the big swings, not sort of being market swings but being supply chain swings, that's way we felt the need for guiding for a period of time. We entered the VHP sector because we think this is a long-term growth market, and we think this is going to be an interesting place to be long term. But exactly how single quarters will be -- and that's -- we are not really giving prognosis on that but given this -- the information that we think that we have normalized, sort of, swings in the supply chain, we think that our sales will more follow the customer sale and the market development than anything else. And we believe this to be an interesting market with a long-term growth potential.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [16]

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Yes. Okay. Got it. But is Q2 sort of a base level where you can grow from? Or is the first half a type of base level that you can expand, grow your revenues from? Or can we sort of compare with something and get a feel for growth going forward?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [17]

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Yes. I think one comment to that would be that we had some quarters during 2017 and '18, which had about SEK 900 million in sales for the Integrated Solution business area. This quarter, we had only SEK 821 million in sales. And compared to those SEK 900 million quarters, which we explained, contained SEK 600 million of VHP and SEK 300 million from the old telecom business, then we are a bit behind in the sales numbers at those quarters. And -- so from that, we can see some potential going forward. And the spread between those 2 areas within Integrated this quarter was that both areas were a bit less than the SEK 900 million in the number of quarters, in the historic years behind us.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [18]

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Okay. Got it. And a final one regarding the Medical side, the comments regarding second half, can you expand this a bit in more detail? Do you expect unchanged organic sales growth in Q3 and Q4? Or if that's how we should interpret that comment.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [19]

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Yes. I think you should interpret that as a second half of the year more situation than the quarters by quarter.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [20]

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Okay. In total, I got it. Okay. That's helpful.

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [21]

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Thank you. Yes, and one comment to that as well could be that it was mainly in the third quarter last year where we had a lot of extra sales from equipment and development funds. So that is one comment as well.

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Operator [22]

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Our next question comes from the line of Oskar Vikström from ABG.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [23]

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Yes. Two really good questions here, but just to follow up on one final thing. The Industrial Solutions segment, obviously, you are mentioning a bit of a slowdown in the economy, and you're feeling that -- you're seeing some sign for that. And then you had negative growth this quarter mainly -- partly due to these hygiene clients. I was just thinking, sort of, when the hygiene client is out of the picture, what would be sort of an -- a good, normal underlying growth for this segment going forward? Would it be negative? Or would you say that it's slightly positive?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [24]

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To start with, I can say that if the hygiene volumes would have been at a normal level, we would have seen a very small growth in this quarter, actually. Going forward, it is, of course, in an economical situation where this business area is in business depending on the economical cycle and what will happen there. We haven't seen any dramatic changes lately, and we have, of course, also heard from the other companies reporting and the industrial companies reporting and, of course, we are in that business, some showing positive signs, but some is also showing negative signs.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [25]

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Yes. Understood. And just one last thing. On the mobile phones weak volumes, what does that entail? Is that like flat? Or is that negative volumes growth? Or...

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Christer Wahlquist, Nolato AB (publ) - President & CEO [26]

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It depends, of course, the way you take your starting point but I would say negative.

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Operator [27]

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(Operator Instructions) Our next question comes from the line of Dhiren Joshi from StockViews.

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Dhiren Arunkumar Joshi, Stockviews, Ltd. - Analyst [28]

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I have 3 questions, please. My first question is, currently you are manufacturing VHP devices for one customer, and that customer is sole sourcing their devices from Nolato. Do you see a risk of the customer moving to dual sourcing of the devices at hand? How might Nolato mitigate this risk?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [29]

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Yes. I got this question many times over the last years but I would like to describe it like this. The VHP sector is a new market. It's new to the end market and there's a lot of development going on. And normally what happens in those early development plans of new product entering new market is that the customer and the partner tend to form a strong relationship with all the innovation going on, and that normally is true. And you sort of pick one customer and you pick one partner and then you work very closely. Over time, we have seen that changing, of course, when the partner -- the production and the market is more developed and the different players on the market have taken their share of the market and is more settled and that normally opens up for the customer to have more than one source and the partner to have more than one customer. So in a longer period of time, I think this will happen and it will happen from both sides. Does that answer your question?

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Dhiren Arunkumar Joshi, Stockviews, Ltd. - Analyst [30]

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Yes. That's clear. Yes. My second question is, within the non-VHP portion of the Integrated Solutions business, you've highlighted excellent growth in the EMC area competing with weak volumes in mobile phones. Are revenues in the non-VHP business net flat on previous quarters? Or is there a net expansion or contraction in that portion?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [31]

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You mean the old telecom business?

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Dhiren Arunkumar Joshi, Stockviews, Ltd. - Analyst [32]

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Yes. So the -- yes. So if you're splitting it into VHP and telecom, then that telecom business, is that flat on previous quarters? Or is that growing or contracting?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [33]

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It is flat compared to the recent quarters. But then, of course, having in mind that EMC is increasing and we have a less good situation with the mobile funds. But as a total, it is similar to recent quarters.

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Dhiren Arunkumar Joshi, Stockviews, Ltd. - Analyst [34]

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Okay. And my final question is, you talked in the past about operating a decentralized operating structure. Would you be able to talk about the benefits you see as a result of this? And also how unique this model is in the industries in which you operate?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [35]

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Okay. It's a model that we strongly believe in, and it's the setup that we have been working for many years. And it's -- the benefit that we see is, we are very, how should I say, close to the customer, can make the right decisions where needed and not at the central headquarter. So I think the benefits of movement together with the customers, making sure you make the right local decisions, are the sort of benefits from this model. The downside, I would say, of course, you could lose some economy of scale in this but from our point of view, this is the best model for our type of business. And in the industry, I think we are on the, how should I say, more decentralized way compared to our peers.

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Dhiren Arunkumar Joshi, Stockviews, Ltd. - Analyst [36]

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So would you say that many of your peers operated decentralized structure to a certain extent? Or would you say more the norm is a much more centralized type of operation?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [37]

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I would say it's more centralized type of model amongst our peers.

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Operator [38]

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Thank you. And as there are no further questions registered at the moment, I will hand the word back to the speakers for any closing comments, please.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [39]

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Thank you very much for attending our presentation and for all the good questions. And I hope you all get a very nice summer and maybe some vacation. Thank you.

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Operator [40]

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