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Edited Transcript of NWGH.ST earnings conference call or presentation 31-Oct-19 9:00am GMT

Q3 2019 Nordic Waterproofing Holding A/S Earnings Call

HELSINGBORG Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Nordic Waterproofing Holding A/S earnings conference call or presentation Thursday, October 31, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jonas Olin

Nordic Waterproofing Holding A/S - CFO & Head of IR

* Martin Ellis

Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board

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Conference Call Participants

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* Karl Bokvist

ABG Sundal Collier Introduce - Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Nordic Waterproofing Q3 Report for 2019. Today, I'm pleased to present the CEO, Martin Ellis; and CFO, Jonas Olin. (Operator Instructions) Speakers, please begin.

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [2]

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Thank you very much. Good morning, everybody. Thank you very much for attending. We are very happy to have you at our quarterly call.

As you might have seen, we presented a good quarterly result for the third quarter. We see continued strong demand, and we probably gained some slight market share points also, which resulted in our sales moving up by 16% over the third quarter last year, 10% of which being organic growth, 4% from the latest acquisitions and 2% from the slightly weaker Swedish krona compared to our reference currencies in Finland and Denmark, especially.

EBITDA increased significantly to SEK 137 million against SEK 102 million last year. Operating profit, similar move to SEK 109 million. And operational cash flow was also increased to SEK 145 million. Earnings per share, SEK 3.29 per share versus SEK 2.97 last year.

Moving on to Page 3. What we see in terms of the market environment is, first of all, in our builders merchants customer group, there continues to be consolidation in the Nordics, especially in Sweden and Norway but also Finland. This is basically neutral for us. In some cases, obviously it's positive, in some cases, it's a negative. All in all, I would say that there hasn't been any net impact on our market position from this consolidation.

The decreased private housing building starts in Sweden, as we have reported before, have not affected us mainly because it's a very small segment of our sales. We continue to see active competition throughout the Nordics in the flat roofing market. But we believe that we have increased our market share slightly in Norway and Sweden in that segment.

The general demand continues to be quite strong. We don't see any downturn in Finland. Obviously, there's a lot of expectations that the market will turn down maybe already next year. We haven't seen any specific impact of that. But that is clearly something which might happen in the near future. We don't see a dramatic downturn. But we had a reasonably good level today in Finland. So it's quite conceivable that demand will be slightly weaker in the future. We continue to have a strong sales development in the prefabricated elements in Norway and we also see a generally stable picture in our raw material costs.

Moving on to Page 4. Strategically, there is no change in our approach. We focus on profitability and organic growth from the development of our recent acquisitions, especially the prefabricated elements business and the green infrastructure business with Veg Tech.

In terms of acquisitions we are looking at, we want to enhance our product and service offerings. We want to benefit from mega trends in the construction industry, like prefabrication, green infrastructure. And in some cases, especially in SealEco, EPDM business, we continue to look for further opportunities to further integrate, to increase exposure to the end customer as we have done with the acquisition of Distri Pond, our latest member.

Promoting sustainability in all shapes and forms remains a key focus. And our new platforms clearly address this strategy. Taasinge prefabricated elements made almost entirely of wood obviously contribute to a positive CO2 impact. And we have strengthened this segment again by a small installation business acquisition in Denmark in July, which means that in our Taasinge prefabricated elements business, we now offer the complete solution from drawing to assembly at the building site, which obviously is good news for our customers and improves the quality of both the logistics and the quality of the execution.

Moving on to Page 5. Our footprint has not changed significantly. You can see that the acquisition rate over the last 2 years represent the number of -- significant number of new sites. Maybe more importantly, sales by segment, Products & Solutions versus Installation Services contracting is stable at 73% to 27%. And renovation continues to be the predominant market even if prefabricated elements especially tend to have a slightly higher content of newbuilds. Sales by country are quite balanced in the Nordics, but basically no significant change here since our last report.

So I'll pass it down to you, Jonas, for financial information.

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Jonas Olin, Nordic Waterproofing Holding A/S - CFO & Head of IR [3]

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Thank you, Martin. So let's dig into the numbers a bit. We see another good quarter with sales of SEK 901 million, up 16% as Martin mentioned. This is our best quarterly sales ever. We continue to grow positively. Strong organic growth of 10%, driven by primarily high activity in -- sorry, by high activity in almost all business units. We also see a significant sales growth in the prefabricated elements business in RVT in Norway.

Acquisitions contribute 4%. And this is mainly Distri Pond and the small acquisition of (inaudible), as Martin mentioned before, contributed by 4%. The result, EBITDA increased to SEK 137 million compared to SEK 102 million. This is including the IFRS 16 effect, which I'll come back to. EBIT increased to SEK 109 million compared SEK 86 million in the last year. So also from the earnings point of view, this is the best quarter ever in the history of Nordic Waterproofing.

Moving to Slide 7. Let's look at the segment Products & Solutions. We see sales of SEK 671 million in the quarter compared to SEK 575 million in the last year, up 17% compared to last year. Organically also, this segment grew 10%. And it's primarily driven by the prefabricated business in Norway, as I just mentioned. And then we see good growth in both Sweden, Finland and Denmark in the legacy business of the flat roofing business.

We also see Veg Tech and the green infrastructure developing quite well in the quarter with good organic growth. And this is the first quarter we have Veg Tech in the comparable number from last year. In addition, we see Finland also having some project sales of geomembranes that have been visible the last 2, 3 quarters. There will be a winter break and we will have some additional volumes in next year as well.

The remaining Europe, growth 31%. That is mostly connected to the SealEco and the rubber membrane business of which Distri Pond growth explains 25% of units. EBITDA in the Product & Solutions was SEK 114 million compared to SEK 82 million last year and EBIT was SEK 90 million compared to SEK 69 million. So we see -- in the period, we see favorable raw material prices due to the bitumen hedge agreements that we signed last year. We also see profit coming from the recent acquisitions of Veg Tech and Distri Pond contributing to our profit.

On Page 8, we continue with the Installation Services segment. Sales was up 11% and ended in SEK 262 million compared to SEK 235 million last year. Organic growth of 9%, and this was primarily driven by the legacy business and the flat roof installation business. The order intake was stronger than last year, although we see -- also the -- we see some increasing competition in Finland. The results increased to SEK 32 million compared to SEK 24 million and EBIT to SEK 27 million compared to SEK 23 million last year.

If we move to Page 9, we continue with the income statement. The group sales and results now mean improved rolling 12 months' numbers as well. We have, for the first time, exceeded SEK 3 billion in sales on a rolling 12-month basis ending at SEK 3.051 billion on a rolling 12-month basis. EBIT ended at SEK 245 million. Net financial items are higher due to the increased interest cost following the higher net debt, higher leverage, primarily following the acquisitions but also the IFRS 16 effect.

We move to Slide 10 and the balance sheet. We see increased capital employed and leverage, SEK 131 million, coming from the IFRS 16. And we also have the acquisition of Distri Pond, which is consolidated as of February this year. Capital employed in total was in line with last quarter, SEK 2.055 billion and return on capital employed increased now and ended at 13.1%, which is in line with our financial target of 13%. The good profit and the good cash flow have decreased the interest-bearing debt and the net debt/EBITDA ratio ended at 2.2, which is down from 2.9 in previous quarter due to the strong cash flow and profit.

On Page 11, you will find the impact from the IFRS 16 implementation. In general, it has affected EBITDA by SEK 37 million year-to-date effect, approximately SEK 12 million, SEK 13 million per quarter, while there is only a marginal effect on EBIT and net profit. Capital employed and net debt have increased SEK 131 million. And ROCE ending at 13.1% would have been 13.5% without the effect from IFRS 16. So the impact is about 0.4 percentage points on ROCE.

On Page 12, we continue with the operating cash flow, which was quite strong in the quarter. Of course, following the normal seasonal variation, we have a higher profit and the net trade receivables increasing somewhat lower than last year. But we also see a lower inventory level in the quarter. So that means SEK 145 million in cash flow compared to SEK 123 million last year. On a rolling 12-month basis, we increased the operating cash flow and it ended at SEK 253 million. And the cash conversion was 74% compared with 65% for the full year of 2018. IFRS 16 also has an impact on the operating cash flow as it increases EBITDA. And that explains 3 percentage units. So that would have been 71% without the IFRS 16 percent, so still a positive development this year.

Martin?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [4]

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Yes. Thank you very much, Jonas. Moving on to Page 13, our financial targets. No change there. And as you've seen, we are basically in compliance with all of these targets and benchmarks.

Last, Slide 14, our outlook 2019 is unchanged. So we expect an operating profit that will be higher than in 2018, assuming normal winter conditions during the fourth quarter. You are probably aware that the fourth quarter is difficult to predict in terms of the weather. And it can -- both sales and profitability can vary quite significantly as a function of when we basically get snow in our countries which stays. And that obviously we can't predict. So basic outlook 2019 unchanged compared to what we said 3 months ago.

Thank you very much. That's our presentation. And we are looking forward to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from the line of Kenneth Toll Johansson of Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [2]

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Yes, so three questions if I may. First, if you can comment a little bit about the order intake trend and the development in Taasinge and RVT, how that looks for the next quarter and into next year in terms of orders. Then also, you write that Veg Tech is starting operations also in Norway. So how much land are you adding in Norway? And what do you expect in terms of sales growth from that added land? And thirdly, acquisitions, your net debt-to-EBITDA comes down very nicely now and a bit sooner than I had expected. You said before that you focus a lot on organic growth and profitability now. But will you start looking for acquisitions sooner than you said before?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [3]

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Thank you very much. First question on demand in our prefabricated elements, we basically see a continued positive trend. And you have seen that order book and sales, especially in Norway, are quite strong. So that's the current status. We don't see any reason to believe that this will dramatically change in the near future. So basically, positive development there. Regarding Veg Tech in Norway, it's a fairly small surface compared to what we have in Sweden. And we will see an impact in about 1 year, when the green substances basically have grown. And it's a small first step. And we would like to extend it if it's successful, of course, and maybe also extend it to other countries in our core geography in the future.

Regarding acquisitions, there's basically no change compared to what we said last quarter, for example. And that is that we are looking actively for acquisitions and we have a number of conversations. We don't want to overpay unless multiples are on the high side right now. So that obviously is a factor, which means that we will probably have less deals than on an average period. But we usually focus on acquisitions where there is significant synergies. So even with high multiples, we can sometimes make a good deal because of the synergies we are able to predict. So that's our current status. But we are actively looking at targets continuously.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [4]

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Sounds great. So on the Veg Tech operations that is close to your sort of bitumen product and so on, have you seen that you have been able to take out synergies in terms of sales growth or costs from that acquisition?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [5]

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That's difficult to identify, I would say. And the short answer would be no. And it hasn't been sort of the key driver of the rationale of these acquisitions. We really wanted to move in to the sustainability. So there might be instances where there is a bit of synergy, and obviously we are trying to look for that. But we can't say today that the significant part of the growth is due to that.

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Operator [6]

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Our next question comes from the line of Karl Bokvist of ABG Sundal Collier.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [7]

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I was just, first of all, curious, what was the organic growth in Sweden this quarter?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [8]

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That's not something which we publish. And it's a bit tricky because it's now a mix of our legacy business and Veg Tech, which is also mainly a Swedish operation. So I think we can say that we are quite sure that we outperformed the market. So we're quite sure that we have slight market share gains.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [9]

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All right. And then going into market share areas, do you see that it's 1 or 2 specific competitors that you are obtaining market share from? Is it from Icopal once again? Or is there anyone else?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [10]

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Yes. I think mainly we are looking at Icopal, which has sort of a strategic shift going on for the last 2 to 3 years, which in some cases means that customers are looking for other options. So that's the biggest part.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [11]

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And when it comes to Norway, could you just give some more detail on your view on the progress of the consolidation? And how long do you believe that you will have to invest extra resources into this market?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [12]

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Yes, I think the position is that it's a slow process. And we have made progress clearly this year in terms of the top line, which means that we, right now, are determined to continue this strategic direction. It's difficult to predict when there will be a significant step-up in our sales as a result of it. But we'll basically continue this strategy in the foreseeable future.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [13]

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All right. And just out of curiosity, it's, of course, a very strong Q3 across the board really. Are there any larger one-off deliveries or orders here that we should take into account?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [14]

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No. Short answer, no. There's nothing exceptional which has boosted sales.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [15]

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All right. And yes, a few other questions here. So I mean previously, in Taasinge, you talked about how you have demand. But just simply in terms of production and delivery schedules that you can't really start producing yet. So I'm just a bit curious about ceiling capacity now and when can you start producing and delivering orders for next year and thereby improve profitability, perhaps.

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [16]

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Yes. So it's an ongoing program. So what we do is obviously we have to accept the fact that some customers can't control their own process in the sense that there can be problems with the building permit, all sorts of exogenous factors which hit our customers and which ultimately we have to live with. So what we are doing is we are trying to emphasize the segment of the market which is more predictable. And so that's an ongoing effort we are making. And we're also fine-tuning our internal procedures in order to be even better in terms of predicting the short-term load of our factories and optimizing the processes.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [17]

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All right. And then as you say Q4 is obviously sensitive to weather. And given what you saw last year, when roughly should one perhaps start to worry is if we start to see snow in all countries in the middle of November, or just a very, very rough estimate how we should think about weather impact.

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [18]

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Yes. Yes, that's quite correct. Usually, if we get snow that remains on the roofs in mid-November, that's not a very good news. And it's a situation we haven't seen for a number of years now. So we have been sort of lucky in the past 3 years, you could say. And that's really the criterion. If you have snow which melts after 2 days, that's not an issue. But if it stays on, then basically roofers take their vacations and it's very difficult to catch that up within the quarter. The good news, of course, is that this work is going to be done in the future in Q1 or Q2 of the following year.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [19]

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All right. And then final question for me has to do with earnings here. First of all, you commented in the report now that you saw some tailwind from hedges. And I -- correct me if I'm wrong, but I don't think you wrote that in Q2. So what I'm curious about now is that will there be sort of a lagging positive margin effect now in Q3 and Q4 and Q1 going forward here, given that we perhaps didn't see that much contribution on it earlier in the year?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [20]

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Yes, I think in Q4 compared to last year, there will definitely be an ongoing effect. Q1, we probably might have a slight effect, too, because the hedge really kicked in, in terms of our results in Q2, during Q2 this year. So there is a slight positive effect over the next 2 quarters, I would expect.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [21]

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Okay. Finally here, previously you talked that the investments you do in Norway, I think you mentioned that it was around some SEK 3 million to SEK 5 million extra during the quarter for Q2. Is it at a similar level now in Q3? And what one should expect going forward as well in terms of additional sales and marketing costs? And then also perhaps if you could provide some insight into how much earnings your M&A contributed?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [22]

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Okay. So the first question is yes, we will continue to invest to some extent. We've probably made the bulk of the investment already. But clearly, we will follow up. And in terms -- I'm sorry, the second question was just in general?

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [23]

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Yes. Related to Norway, I think your peers have talked about this was -- this contained about, I think, SEK 3 million or SEK 5 million in extra costs in sales and marketing. Will this level be the same going forward?

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [24]

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Yes. In the short term, we will continue with that sort of level, yes.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [25]

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All right. And then my second one was about M&A. If I could just get some flavor on the earnings contribution from acquisitions.

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [26]

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That's not usually something we publish. Obviously, what you see now is that the effect is becoming quite small since we haven't made any large acquisitions for the last more than 12 months now. So it's sort of petering out to some extent. I think that's the key factor here.

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Karl Bokvist, ABG Sundal Collier Introduce - Analyst [27]

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And congratulations on a strong report.

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [28]

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Thank you very much.

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Operator [29]

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(Operator Instructions) And there are no further questions at this time. Please go ahead, speakers.

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Martin Ellis, Nordic Waterproofing Holding A/S - CEO, President & Member of Executive Board [30]

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Yes. Thank you all very much, and we look forward to speaking to you again in 3 months' time. Thank you.