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Edited Transcript of OPUS.ST earnings conference call or presentation 16-Aug-19 12:00pm GMT

Q2 2019 Opus Group AB (publ) Earnings Call

Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Opus Group AB (publ) earnings conference call or presentation Friday, August 16, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Helene Carlson

Opus Group AB (publ) - Director of Corporate Communications & IR

* Linus Brandt

Opus Group AB (publ) - Executive VP & CFO

* Lothar Geilen

Opus Group AB (publ) - CEO & President

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Conference Call Participants

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* Christer Olof Beckard

Nordea Markets, Research Division - Director

* Henrik Alveskog

Redeye AB, Research Division - Equity Analyst

* Mats Liss

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to today's presentation of Opus Q2 2019 Results Call, with Lothar Geilen, CEO; and Linus Brandt, CFO. (Operator Instructions) I must advise you this conference is being recorded today, Friday, the 16th of August 2019.

I would now like to hand the conference over to your first speaker today, Lothar Geilen, CEO. Thank you, and please go ahead, sir.

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Lothar Geilen, Opus Group AB (publ) - CEO & President [2]

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Thank you, Rose, and good afternoon, everyone. Welcome to our quarterly call, Q2 2019. We had solid performance in the second quarter. It's in fall, but it's a seasonally strong quarter, many people have their car inspected in spring and that's true around the world, except for South America. And revenue and earnings grew and we've shown good results.

In the Vehicle Inspection U.S. & Asia, we have a good margin development, in part driven by a higher Equipment as a Service volume and revenues. We have also announced in the CEO letter that we're expanding our Equipment as a Service activities into the Philippines, expect to sign first contracts with inspection stations in Q3 of 2019. And we have completed the opening of 26 stations in Punjab, Pakistan and those are all operational.

In the segment Vehicle Inspection Europe, we had a solid performance in Q2. Our volume was slightly lower. It was in part offset by higher fees and resulting in a higher revenue per inspection, a KPI that we are closely watching. Latin America is a seasonally lower quarter as there is winter in Q2 in South America, but earnings have improved compared to last year. We've added, I believe, an additional station in Chile in July and expect to grow the Chilean business to 11 stations by the end of 2019, and that should contribute to -- positively to our results.

The IVS business continued to grow. We're satisfied with revenues. Obviously, the earnings were not meeting everybody's expectation. However, they were impacted negatively by primarily 2 reasons: one is expansion activities related to the collision business, where we are building capacity within the organization, that's negatively impacting our earnings, that's a growth-related expense that we may see for another quarter or 2; and the second impact was result of a legal dispute where we had legal expenses that are one-off expenses for one of our smaller business activities under the IVS umbrella.

Important to mention in this context is that we signed a first exclusive contract with an estimating company in U.S. called Mitchell, and that's a good sign and we are entering the collision scanning market with that contract and hope to be performing quite well in that segment.

With that, I'd like to turn it over to Linus to report on the financial details.

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Linus Brandt, Opus Group AB (publ) - Executive VP & CFO [3]

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Thank you, Lothar. Good afternoon, everybody. So I'll present the financial highlights for the group. In Q2, our revenue amounted to SEK 708 million in the second quarter compared to SEK 651 million last year, which means that we had a revenue growth of 9% and the revenue has been positively affected by the stronger U.S. dollar but also from the acquisition of VTV in Argentina in May 2018. The organic growth in constant currencies was 2% in the second quarter and organic growth is mainly driven by Equipment as a Service expansion as well as Intelligent Vehicle Support division growth and some growth in Latin America, basically in Chile.

EBITDA reached SEK 180 million in the second quarter compared with SEK 142 million in Q2 last year. As you know, we have implemented IFRS 16 from January 1 this year and it had a positive impact, particularly on EBITDA. So adjusting for IFRS 16 effects, the EBITDA was SEK 155 million and consequently grew by 9% compared with last year. And except for the stronger U.S. dollar, this was also driven by the increase in Equipment as a Service volumes and improved results in Latin America. So I will get back to the implementation on IFRS 16 effects on the next slide.

EBITA amounted to SEK 120 million in the second quarter compared with SEK 108 million in Q2 last year. And we had an EBITA growth of 11%, again mainly driven by Equipment as a Service. And the positive effect from implementation of IFRS 16 is fairly limited in relation to EBITA as you can see on the next slide, and the reported EBITA margin was 17%, which is in line with last year. I also want to mention that the group's net financial item was negative by SEK 47 million in the second quarter and we had unrealized losses on FX on intercompany loans of SEK 20 million. So deducting that, we had financing cost of SEK 29 million, which also includes IFRS 16 effects of SEK 5 million. And deducting that, we are looking at some SEK 24 million of financing costs on our external financing which is about 4% on an annualized basis. So net earnings for the period was SEK 19 million compared to negative SEK 27 million in the second quarter last year. And earnings per share, as you see, is SEK 0.08.

In Q2, the cash flow from operating activities was SEK 132 million in Q2 compared with SEK 111 million last year. This improvement is, of course, also relating to the improved EBITDA, partly from effects from the IFRS 16 implementation. And investments in fixed assets amounted to SEK 64 million, which mainly consisted of machine and equipment, relating to Equipment as a Service, but also a few inspection stations in Chile and Sweden added to that. So free cash flow before acquisitions amounted to SEK 68 million in Q2, which was impacted by positive effect from implementation IFRS 16 by SEK 20 million. So the free cash flow adjusted for that is SEK 49 million compared to SEK 44 million in Q2 last year.

So just to summarize our financial position at the end of June, we had cash exceeding SEK 400 million, we had equity of about SEK 1 billion, net debt about SEK 1.9 billion by end of June and, as you know, we had net debt-to-EBITDA of 3.1 based on the last 12 months, adjusted for pro forma EBITDA from acquired businesses, VTV. So this is obviously a significant improvement compared to the same time last year, where we had net debt-to-EBITDA of 3.5. So gross debt amounted to almost SEK 2.4 billion. But as you know, IFRS 16 is adding another SEK 300 million. So that is -- deducting that, we have SEK 2.1 billion of that of external financing.

On the next slide, you can see the impact of IFRS 16 and some key financial numbers in Q2. So in the second column to the left, you will see the reported numbers, including IFRS 16; and in the next, you will see the adjustments of the effects from IFRS 16; and in the following, you will see excluding IFRS 16 effects.

As I have already mentioned, the IFRS 16 had a significant impact on EBITDA and the margin and while a smaller impact on EBITA. I also talked about the cash impact already. We've had some effects on the financing, as I already mentioned, and we also had some effects on equity/asset ratio of about 2 percentages.

Yes, on the next slide, you will see some one-off costs affecting net earnings in Q2, for the first -- in Q2 and the 6 months, first half of 2019. And so as I mentioned already, we had some unrealized exchange losses of SEK 20 million and it's relating to the intercompany loans in Argentina, Pakistan and Chile in the quarter, obviously due to the stronger U.S. dollar in relation to those currencies.

So on the following slide, we present the revenue growth and the development on the trailing 12 months. So from the trailing 12 months in Q3 2017, we see a pickup in the revenue growth, mainly through the result of acquisitions in Argentina, VTV, and Autologic in U.K. and Gordon-Darby in the U.S. and from expansion into new markets as well as increasing revenue from Equipment as a Service and IVS.

And the drop in EBITA margin in the trailing 12 months from Q2 2017 until the end of 2017 was primarily due to a result of the growth activities. And the trend has been positive thereafter, again driven by acquisitions and organic growth of Equipment as a Service, et cetera.

And now I'd like to hand over to Lothar, who will tell you more about the performance of the divisions and segments as well as the financial targets and performance in relation to that. Thank you.

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Lothar Geilen, Opus Group AB (publ) - CEO & President [4]

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Thank you, Linus. So we continue with the performance versus our financial targets. Revenue growth last 12 months amounted to 17% compared to our target of 5% to 10% annual growth rate of a 3-year CAGR. The margin development EBITA margin is at 15%, which is our target and net debt/EBITDA, as Linus mentioned, is 3.1, slightly above 3.0, but with a clear trend downwards over the last few quarters.

In Q2 of 2019, just to summarize details for the 2 divisions. In vehicle inspection, we had a total growth of 8%, organic growth of 1% and EBITA margin of 20%. U.S. inspection business is performing well. And in IVS, as I mentioned earlier, we have shown a good growth, but the underlying profitability was negatively affected by the 2 reasons I mentioned earlier in the call. And EBITA is at -3. We still have very positive and high hopes for this business going forward. We think it's tremendous business that will give us strong strength going forward.

When we look at the segments in vehicle inspection, all 3 segments have margin improvements. We have seen in the U.S., an EBITDA margin of 21 -- EBITA margin of 21%, in Europe of 21% and in Latin America we improved to minus 12%, with an upward trend. Our revenue increased significantly in the U.S., dropped a little bit in Europe, still as a result of the change in inspection interval which should be completed now. The impact of that, we still have lack of comparability quarter-to-quarter, year-over-year comparison due to the inspection interval change, but the drop of the revenue should be completed in Q2.

Emission as a -- I'm sorry, Equipment as a Service, we see continued growth in the U.S. to a run rate of now SEK 31 million, and we expect this business to continue to grow throughout 2019. We're still working on 2 states in U.S., Pennsylvania and Texas, and the business is going well.

We also made an announcement that we are expanding into the Philippines, and hope to sign first Equipment as a Service contract with station operators in Q3, anytime very soon, in the next few weeks. So overall, we see a solid performance in the second quarter. Revenue increased to SEK 708 million, 9% increase. EBITDA -- EBITA increased by 11% to SEK 120 million. And the margin reached 17%. I mentioned the expansion of EaaS into Asia and to the Philippines, and the signing of an important first exclusive contract in the collision scanning market for our business.

And with that, I would like to give it back to Rose and open up for questions. Rose?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Henrik Alveskog of Redeye.

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Henrik Alveskog, Redeye AB, Research Division - Equity Analyst [2]

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This is Henrik. Could you tell us a little bit more about the Philippine market? I think it's new to all of us, both what your ambitions are for the near-term future and then maybe what do you see looking few years ahead there?

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Lothar Geilen, Opus Group AB (publ) - CEO & President [3]

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Sure. Happy to provide some additional information. So the Philippines used to have a -- currently has an emission testing program, one of the few countries outside of U.S. and Canada that are focusing on emission only. And the government has decided to include road safety and perform safety and emission inspections going forward. A regulation was passed, I believe, in December, and the government has asked operators to apply for concessions. Currently, there are hundreds of operators of emission testing stations. We believe that the new number -- final number of concessions will be in the range of 200 for the Philippines and these 200 stations have to basically increase from a simple emission test to a very complex world-class safety and emission testing station. They are required to deposit USD 200,000. They need to provide land and buildings and need to have equipment and technical services. So our play in the Philippines is not to operate inspection stations, but instead to be a technology provider to the existing operator -- to the operators that apply for a concession.

We will be providing equipment, service, installation, maintenance, training to the operator -- to the inspectors, oversight, data management system and data communication with the government. And we will be -- we expected to be paid a portion of the test fee and we require a minimum number of inspections to be performed by each station per month. And so since the Philippines has an existing emission testing program, the compliance rate in the country is very high. It's nearly 90s -- probably 90% in that range. And as the new inspection stations come online, the particular geographical region where that station is located will switch over from 1 day to the next from emission testing to the new safety inspection program in that station. I cannot tell you how many of the 200 stations may or may not sign up with us. We've received good interest from the operators. And we hope to be signing up the first stations here next week, hopefully.

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Henrik Alveskog, Redeye AB, Research Division - Equity Analyst [4]

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All right. Great. Could you also maybe give us some more flavor on your operations in Pakistan now, 26 stations as compared to, I think, 12 last year? Could you give us some feeling for -- will your revenues be substantially higher this year in Pakistan and are operating costs also increasing to begin with during this year, so to speak?

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Lothar Geilen, Opus Group AB (publ) - CEO & President [5]

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Yes. So as you know, we have been sitting for a little while on those stations until they got finally certified for opening. And so the operating costs are not expected to go up significantly. We are, however, working -- because we had hired already inspectors in the expectation that we can open the stations. We are, however, working closely with the Punjab government to increase the compliance rate and we have had many discussions and we see a good trend forward in that direction. I think that by early next year, we'll have some additional information regarding future outlook.

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Henrik Alveskog, Redeye AB, Research Division - Equity Analyst [6]

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Okay. Great. And then just finally from me, regarding the Swedish market or Vehicle Inspection Europe, as you report it. I was a bit surprised to see the high revenues in this quarter and -- well, considering market shares and all that, did something happen really here during the spring in terms of the price adjustments? I haven't noticed that. And so that kind of was, I guess, the reason why I was a bit surprised. And I also see in your numbers in the -- where you report the split between -- well, within that segment, there is a bigger portion of other income, if you could specify that a little bit?

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Lothar Geilen, Opus Group AB (publ) - CEO & President [7]

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Sure. Well, first of all, I'm glad to hear that you didn't notice price increases. That's always a good sign. It's -- we've had a shift from focus on market share to a focus on profitability. And I think that you'll see the first results of that. We have implemented what we call intelligent pricing. And the idea is that the fee per inspection increases, the revenue per inspection increases. And I think we managed that in the second quarter and we hope to continue with that going forward. As it relates to the other revenue, we are focusing on volunteer -- what we call volunteer inspections, so activities within end of lease inspections and some other activities that we perform outside of the regular mandated inspection of vehicles. And we see a first good positive results and hopefully, we can grow that activity going forward.

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Operator [8]

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(Operator Instructions) And your next question comes from the line of Christer Beckard of Nordea.

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Christer Olof Beckard, Nordea Markets, Research Division - Director [9]

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I had some bad connection there, so maybe I didn't catch everything you were saying about Philippines, so that's the question that came from Henrik there. So just trying to see if I caught it all. But I am a little bit worried actually that you're going to Philippines, it can -- I also see the opportunity but just to get a feeling around it, are you -- I mean, when you did the EIS in the U.S., it was actually performing better than you expected. And to put that in perspective, are we talking about more or less the same amount of money? Or more or less than the actual investment and costs associated with that expansion there? So that's my question.

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Lothar Geilen, Opus Group AB (publ) - CEO & President [10]

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Okay. Christer, maybe you can go back to mute.

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Christer Olof Beckard, Nordea Markets, Research Division - Director [11]

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Yes.

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Lothar Geilen, Opus Group AB (publ) - CEO & President [12]

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Thank you. Thank you, Christer, for your question and happy to respond. We're working -- in the Philippines, we're working with a financial partner, a bank that will provide us with financing for the equipment. We will have an operating lease. And as a result of that, we expect the CapEx required for the expansion into the Philippines to be manageable, relatively low compared to the business opportunity. There are some similarities between California or, let's say, the U.S., and the Filipino inspection business which is important, and that is that in both cases, there was an established vehicle inspection program, with an established compliance rate. So this is not a greenfield operation similar to Pakistan, but it's an existing inspection program that simply -- where simply technology gets replaced, old technology gets replaced with new technology. And -- so I think the risk of going into the Philippines is reasonably low and potential reward is very attractive to us. I hope, I answered your question.

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Operator [13]

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And your next question comes from the line of Mats Liss of Kepler.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [14]

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Mats Liss, Kepler Cheuvreux. Well, coming back to the Philippines, I just wondered if you could sort of rank the opportunity in the Philippines compared to Pakistan and maybe also Latin America in the 5-year perspective.

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Lothar Geilen, Opus Group AB (publ) - CEO & President [15]

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So Latin America is not one opportunity, of course. It is a little bit difficult for us to understand the success we will have in the Philippines because we're just starting with the sign-up process of the stations. There is 200 -- expected 200 stations, there's 4.5 million vehicles, 7.5 million motorcycles, and I can't tell you what percentage of those 200 will eventually sign up with us. We received good interest, but as of the time we speak, we have not signed up the first inspection station yet. So we have 0. I think if you give us another quarter or potentially 2 quarters, by the end of the year, we'll make a -- or hopefully, sooner, we'll make a press announcement of the level of success we have and we expect from the Philippines.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [16]

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And -- well, as I understand it, there is a competitive procurement process from these stations, so do you have competitors involved with you?

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Lothar Geilen, Opus Group AB (publ) - CEO & President [17]

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So the competition is actually for the concession of -- for these inspection stations. So those are local operators. And once a local operator has, what's called, an authorization -- has obtained an authorization, we would sign up. And they have interest in working with us, we would sign them up, all right? So there's the first batch of operators that have obtained a concession to open an inspection station. And that's why we are receiving the interest from them to work with us on this project.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [18]

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So there are no other advisers involved. I mean you're the only one helping them all?

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Lothar Geilen, Opus Group AB (publ) - CEO & President [19]

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Yes. So when you talk about the competition, there is obviously equipment manufacturers that sell equipment and -- but that's a different level, right? There's nobody else doing the same business model at this moment as we are.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [20]

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And well, how much money do you have to sort of invest to be able to compete in this area?

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Lothar Geilen, Opus Group AB (publ) - CEO & President [21]

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Yes. We are working with a local financing partner, a local bank that will provide the CapEx and basically will buy the equipment and provide it to us on an operating lease basis. So we expect the CapEx to be rather low for the Filipino program.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [22]

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Okay. Great. Well, we'll wait a couple of quarters to see how it develops then. And then just, well, looking at the financial net there, you mentioned a currency impact there. And could you give some indication about the third quarter now, I mean, the peso have sort of depreciated quite substantially during the third quarter?

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Lothar Geilen, Opus Group AB (publ) - CEO & President [23]

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Yes. We're in middle of the quarter, Mats. I'm not sure I can give you an estimation of how the quarter ends in terms of the peso decline, is the peso coming back or going down further, that's beyond my pay grade. But as soon as the quarter is over, we can have a discussion on what impact it had. I'd be happy to define that. But at this moment, I don't think I'm in a position to provide that information. Anyway on a peso basis, the business is performing well. We don't think that it had any negative impact actually on the month of July and probably no negative impact on the month of August yet, right, because on the peso basis the business is performing well.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [24]

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And could you just update me on the sort of potential you have in increasing prices -- I mean, the inflation is quite substantial and is it possible to do this right away? Or do you have to wait a few months before you do the next...

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Lothar Geilen, Opus Group AB (publ) - CEO & President [25]

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Yes. The price increases are contractually defined and they are different from program to program. Some are -- and in fact, we just got some fee increases in July, some are tied directly to the salary and inflation on the salaries or the salary increases that are negotiated and some are just done on a regular quarterly basis and some are done maybe on a slightly longer basis. So it's not always properly aligning with the inflation. But if you look at it longer term over -- instead of looking at on a month-by-month basis, you look at it more midterm, it's pretty well aligned with the inflation, right? But sometimes you can get a spike in salaries in 1 month and maybe the adjustment comes a month later or maybe it comes a month before. It doesn't always line up with the actual cost increases.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [26]

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Okay. And just finally about the tax charge there or it was quite high in the quarter, should we -- well, could you say something about the balance of the year and what level do you expect for the remainder of the year?

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Linus Brandt, Opus Group AB (publ) - Executive VP & CFO [27]

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Well, we don't predict the tax rate for the year, Mats. But I mean, there might be losses in different subsidiaries where we're not recognizing the deferred tax assets on those losses until we can know we can definitely use them. That could be one reason. And we also have effects from the FX effects going straight to equity, where we're paying tax on gains and the opposite on losses, so thousand different reasons for it, not going into specific.

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Operator [28]

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There are no further questions at this time, sir. Please continue.

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Lothar Geilen, Opus Group AB (publ) - CEO & President [29]

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Helene, do we have any more questions from the web?

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Helene Carlson, Opus Group AB (publ) - Director of Corporate Communications & IR [30]

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No, nothing on the web.

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Lothar Geilen, Opus Group AB (publ) - CEO & President [31]

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Okay. Just wanted to make one more statement that there was a question regarding the organic growth in the U.S. vehicle inspection business being lower than expected. And the reason for that is related to the fact that in the previous year Q2 2018, we had significant increase in equipment sales as we reported at the time in our Q2 report for 2018. And that increase in equipment sale didn't happen in Q2 2019. So the organic growth was reduced this quarter compared to the prior year's quarter. I hope people understand the impact, and it's not a negative on the ongoing business of Opus, but more related to timing and the onetime increase in equipment sales in last year.

So with that, I want to thank you for your attention and look forward to talking to you again in 90 days for our third quarter report, and wish you all a happy and successful afternoon. Thank you very much and talk to you soon. Bye-bye.

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Operator [32]

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Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect.