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Edited Transcript of OPUS.ST earnings conference call or presentation 14-Nov-19 9:00am GMT

Q3 2019 Opus Group AB (publ) Earnings Call

Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Opus Group AB (publ) earnings conference call or presentation Thursday, November 14, 2019 at 9:00:00am 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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* Henrik Alveskog

Redeye AB, Research Division - Equity Analyst

* Mats Liss

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Stefan Knutsson

ABG Sundal Collier Introduce - Research Analyst

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Presentation

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Operator [1]

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Thank you all for standing by, ladies and gentlemen, and welcome to today's presentation of Opus quarter 3 2019 results. (Operator Instructions) And please be advised that today is being recorded.

I would now like to hand the call over to your speaker, Mr. Lothar Geilen. Thank you. Please go ahead.

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

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Yes. Thank you, Paul, and good morning, everyone. Welcome to the Opus Q3 interim results report. We are happy to report a good performance. Overall, good performance in our main businesses and Vehicle Inspection U.S. and Vehicle Inspection Sweden, which resulted in good growth and underlying good profitability.

Opus today is one of the global leaders in vehicle inspection as well as a provider of vehicle -- intelligent vehicle support to various markets globally. Our division in vehicle inspection exists and includes 3 segments. We have a segment Vehicle Inspection U.S. & Asia, which is our largest section -- segment, then we have Vehicle Inspection Europe and Latin America. And as I said, the division, Intelligent Vehicle Support.

We are active in 10 countries. And our revenue over the last 12 months is SEK 2.7 billion. We have published financial targets of 5% to 10% annual growth rate over a 3-year CAGR, 15% EBITA margin is our target and a net debt-to-EBITDA ratio of not to exceed 3.0.

Diving into the third quarter. As I said, we performed quite well overall in the third quarter. Our underlying EBITDA -- EBITA adjusted for the one-off impairment costs that we incurred in Argentina as a result of the loss of a concession, which we communicated earlier this year. That was a SEK 21 million hit. Adjusted for that impairment cost, we reached EBITA of SEK 116 million, which is equivalent to an EBITA margin of 17%.

Vehicle Inspection U.S. & Asia delivered constant good results as usual. Our U.S. emission testing remained stable and profitable and well operational -- operationally managed with solid earnings, and I want to point out, in particular, that Equipment as a Service business continues to grow in that market.

In Vehicle Inspection Europe, we are now taking advantage of our solid market position, our continued efforts to increase revenue per inspection and further cost-reduction efforts in the company, which we started late last year.

Latin America's underlying performance was stable and showed resilience despite some political instability in various parts of Latin America and some currency fluctuations. Obviously, impacted this quarter by the one-off cost resulting from the shutdown of that one concession in Buenos Aires, Argentina. All other businesses in Argentina, though, important to note, are profitable and generating good results.

EBITA in our IVS division is behind expectation. We're not happy with the profitability of that segment -- of that division, and it's primarily due to our continued investment into further expansion. We are expanding into new business areas that we presented to all of you already and also impacted by one-off cost resulting from legal costs, and as I said, business ramp-up expenses. At the same time, IVS has generated continued increase in revenues.

And with that, I'd like to turn it over to Linus to report on our financials.

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

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Thank you, Lothar. Let me present the financial highlights for the group in Q3. As you know, revenue amounted to SEK 699 million in the third quarter compared to SEK 634 million last year. That means that we had a revenue increase by 10% quarter-over-quarter. The organic growth in constant currencies was 8% in the third quarter, and organic growth is mainly driven by the Equipment as a Service expansion in the U.S., increased revenues from the inspection business in Sweden and Latin America as well as a continuous growth in Intelligent Vehicle Support division.

So EBITDA reached SEK 181 million in the third quarter compared with SEK 129 million in Q3 last year. And as you know, we have implemented IFRS 16 from January 1, and this had a positive impact, particularly on EBITDA.

So adjusted for IFRS 16 effect, EBITDA was SEK 156 million and consequently grew by 21% compared with last year. In addition to a positive U.S. dollar effect, this was also driven by the increased Equipment as a Service volumes and strong performance by the inspection business in Sweden.

So I'll get back to the effects from the implementation of IFRS 16, which is summarized, as you can see, on a separate slide. EBITA amounted to SEK 96 million in the third quarter compared with SEK 91 million in Q3 last year, and the margin was 14%, which is in line with last year. So EBITA was negatively affected by the one-off impairment cost in Argentina at SEK 21 million due to the canceled concession in Buenos Aires, as Lothar mentioned. So adjusted for the impairment cost in Argentina, the underlying EBITA is SEK 116 million, representing a margin of 17% in the third quarter, as also Lothar mentioned. The positive effects from the implementation of IFRS 16 on EBITA was fairly limited as you see on the next slide.

Going on to net financial items, that was minus SEK 58 million in Q3, and that's including a SEK 32 million in unrealized FX losses, mainly attributable to U.S. dollar intercompany loans in Argentina and Chile, where the local currencies have depreciated versus U.S. dollar.

Interest and related financing costs on our external financing was SEK 24 million or about 4% on an annualized basis.

Net earnings for the period was negative by SEK 26 million in the third quarter, and this is mainly an effect of the write-down in Argentina, as we talked about already, the unrealized FX losses as well and some tax expenses from FX gains recorded directly against equity.

So earnings per share is -- in Q3 was 0. And this is despite the reported negative net earnings of minus SEK 26 million for Q3. And is due to that the net earnings attributable to the parent company shareholders is, in fact, close to 0, while there is a negative result attributable to minority shareholders of minus SEK 25 million, and this loss is mainly tied from the negative results in companies in Argentina and write-down as we just talked about, where we have significant minority shareholders.

Cash flow from operating activities was SEK 153 million in Q3 compared with SEK 55 million last year. And this improvement is mainly a result of the higher EBITDA in Q3 this year as well as the positive working capital effects.

Investments in fixed assets amounted to SEK 60 million, which is mainly consisted of machinery equipment in relation to Equipment as a Service but also some new stations being opened in Chile.

Free cash flow before acquisitions amounted to SEK 94 million in Q3, which was impacted by a positive effect from the implementation of IFRS 16, SEK 20 million, so the free cash flow adjusted for IFRS 16 was SEK 74 million compared with minus SEK 4 million in Q3 last year, which is obviously an improvement.

Just to summarize our financial position at the end of September, we had cash around SEK 500 million. We had the equity about SEK 1 billion. And we had an equity asset ratio of 23%. Net debt amounted to SEK 1.9 billion, which includes leasing liabilities of about SEK 250 million. Adjusted for that IFRS 16 leasing, the actual net debt was SEK 1.7 billion at the end of September.

So net debt to EBITDA was just below 3.0, even though the rounded is 3.0 based on the last 12 months. And obviously, it's in line with our financial target to stay below 3.0. So we have put that. This is also a significant improvement compared to the same time last year, where net debt to EBITDA was 3.4. Just to -- another note, external interest-bearing debt growth is about SEK 2.2 billion.

So on the next slide, you will see the impact of IFRS 16 on the key financial numbers in Q3 2019. So in the third column to the left, you will see the reported numbers, including IFRS 16. So in the next column, you will see the adjustment of the effects from IFRS 16 and in the following column, you will get the Q3 2019, excluding obviously the IFRS 16 effects.

So I've already mentioned that IFRS 16 had a significant impact on EBITDA and margin, while it had a small impact on EBITA and its related margin.

Operating cash flow and free cash flow impacted by the same amount, about SEK 20 million, but of course no impact on the net cash flow. Again, net debt increased by almost SEK 250 million due to the leasing liabilities from IFRS 16.

The leasing assets liabilities have resulted in total assets increasing by the same amount, which has a negative impact on the equity asset ratio of about 2 percentages.

On the next Slide 7, we summarize what we would call one-off costs affecting earnings in Q3 2019 and the first 9 months of the year. And as we already mentioned, we had one-off impairment cost due to the cancellation of the concession in Buenos Aires, SEK 31 million and unrealized exchange losses, again, to SEK 32 million and some legal cost in Q3 of SEK 4 million.

On the following slide, we present the revenue growth and EBITA margin development between 2014 and Q3 2019 based on trailing 12 months. And as you can see from the trailing 12 months in Q3 2017, we see a pickup in the revenue growth mainly as a result of the acquisitions in Argentina, Autologic and Gordon-Darby, and from expansion into new markets as well as increasing revenue from Equipment as a Service and IVS. So the drop in EBITA margin in the trailing 12 months from Q2 2017 until end of 2017 was primarily due to a result of growth activities. And the trend has been positive thereafter, again, driven by acquisitions and organic growth of Equipment as a Service, et cetera.

So by that, I would like to hand over to Lothar, he's going to tell you a little bit more about divisions -- performance of the divisions and segments.

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

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Thank you, Linus. Just a quick summary on our comparison to the financial targets, which we already briefly touched on.

At the end of September, we had 17% revenue growth. Calculated at the 3-year CAGR, we had 15% EBITA margin. Both the revenue growth exceeding our target, the margin hitting our target. And on the leverage, we're also right on the target at 3.0. In fact, we had slightly below 3.0, rounding up to 3.0. So we're quite happy with the overall performance against our financial targets.

So let's talk a little bit about our performance in Q3. We have seen growth in both divisions, both in Vehicle Inspection as well as in IVS, Intelligent Vehicle Support.

On the Vehicle inspection side, we've seen a 10% growth, organic growth of 8%, that's a little above our expectation according to our financial targets. And we've seen good EBITA improvement due to strong performance in Sweden, in our Vehicle Inspection Europe segment and our continued success with Equipment as a Service, additional rollouts and gain of market share, both contributing to the profitability increase. Obviously, a negative impact resulting from Argentina, which we mentioned now several times.

On the IVS side, we had a total growth of 7%, organically of 3%. There's still some acquisition growth in addition to the organic growth. And our EBITA margin is lower due to ramp-up cost and some cost related to legal proceedings that are both one-off expenses.

Looking more into the segment and our vehicle inspection. We had, as I said, good growth in both U.S. and Europe, 11% each overall, whereas the U.S. segment showed an organic growth of 4% and increased margins, primarily due to the higher Equipment as a Service volume. In the European segment, we had a higher profitability, in part, due to stabilized inspection volume in the overall market as well as better performance in terms of higher fee per inspection and continued cost-reduction efforts in the organization. We're happy with the stability of both markets and look forward to future success.

Latin America, outside of the impact resulting from the one-off expense, we're happy with the performance. We had good organic growth in Argentina, in particular, but also in Chile. And when we subtract the impact from the one-off expense, I think our profitability is on the right track, and we look forward to continued stable performance in that segment. We're particularly quite happy with the performance despite some of the political instability in Argentina and Chile that we have seen.

Talking about Equipment as a Service market. We have now passed our goal of USD 30 million that we set out for 2021, with $33 million run rate, and we expect that to continue for a little while, and quite happy with the performance overall of that activity.

During November, early November, we announced a new branding efforts for the Intelligent Vehicle Support division. We are now branding company's Drew Technologies, AutoLogic and Bluelink, all under the same brand. We call it Opus IVS. IVS stands for Intelligent Vehicle Support. And our objective of Opus IVS is to help independent workshops repair complex vehicles around the world. By creating one company and one brand, Opus IVS, first, it's a logical step by bringing these companies together, and it will help us deliver even more advancements in these markets and significantly more NIM recognition going forward.

We continue to use temporarily the older company brands Drew Tech and Autologic for a little while just to help with the transition. If you're interested in further details on Opus IVS, we're listing the website, opusivs.com. Feel free to check it out for us.

So to summarize the quarter, we had a strong underlying performance in the third quarter, revenue grew by 10%, organic growth of 8%. EBITA increased by 6% to SEK 96 million and a margin of 14%, adjusted for the one-off in Argentina, it's even 17% and SEK 116 million. We had strong performance in the Swedish Vehicle Inspection business as well as in the U.S. Inspection business. We see continued growth in the Equipment as a Service businesses in the U.S. And we are slightly below our financial target of 3.0 for the net debt-to-EBITDA ratio.

And last but not least, as we've reported, our cash flow is increasing and delivering good results.

So thank you for your attention. I turn it back to the operator. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question, it's from the line of Stefan Knutsson from ABG.

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Stefan Knutsson, ABG Sundal Collier Introduce - Research Analyst [2]

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I was wondering about Sweden. It was obviously a strong quarter with some new market dynamics, but the margin improvement was very, very solid here. Can you give us some more flavor on that, how to view it? And if it's sustainable going forward?

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

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Yes. Stefan, thank you for your question. So first of all, to talk a little bit about Sweden, we are now past the inspection volume adjustment -- downward adjustment resulting from the regulatory change to -- primarily to go from a 12- to 14-month inspection interval. "And we're back to normal."

In addition to the stability and the inspection volume, what we see is a change in the seasonal behavior of the inspection volume. So it's really difficult to compare quarter-to-quarter in Sweden at the moment because as we go from 12 to 14 months, there's a different behavior and we should be careful to compare quarter-to-quarter. We're very happy with the Q3, it's -- margins are very nice. But in part, that may be impacted by the seasonal change. And it remains to be seen going forward, what impact that has.

So I would like to advise to be careful when we compare quarter-to-quarter results. Overall, the market is stable, and we see a slight increase overall. But we have 2 other impacts that will have helped the profitability. First one is our cost savings that we started last year. And the second one, as I mentioned earlier, is the flexible pricing, which we believe leads to an increase in revenue per inspection, and all of that obviously helps stabilize margins and improve our results.

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Stefan Knutsson, ABG Sundal Collier Introduce - Research Analyst [4]

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Okay. And I also have a follow-up question on Latin America, and especially Argentina. You put some -- you showed some strong organic growth, but you mentioned that it's from price adjustments mainly. Can you say something about how the number of inspections are developing in Argentina?

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

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Yes. Thank you. So obviously, organic growth is driven by the fee adjustments, in part. We have significant price increases that -- I'm sorry, yes, significant price increases that help our organic growth. There's no question about it. The underlying market development is positive. We see slight increases in the single-digit range, certainly higher than what is to be expected in Europe or in the U.S., but still in the single-digit range that affect the overall inspection volume. And as a result of that, we have slight increases in the single-digit range in our inspection volume in all our stations. On a local currency basis, performance of the -- of all 3 inspection concessions in Argentina is good.

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Operator [6]

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The next question is from the line of Henrik Alveskog from Redeye.

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Henrik Alveskog, Redeye AB, Research Division - Equity Analyst [7]

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Yes. First, a couple of questions on IVS. You call them ongoing legal proceedings when you are describing the SEK 4 million that was -- well, that weighed on the results. What -- do you see these proceedings coming to an end pretty soon? Or could you give us an idea of what it relates to?

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Lothar Geilen, Opus Group AB (publ) - CEO & President [8]

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Yes. Henrik, thank you for your question. We went through discovery phase, and discovery phases in the U.S. are usually quite expensive. We completed those, and we are hopeful that we can bring the legal proceedings to an end in the near future. But I can't speak to the details of the situation and be happy to report again in Q4 where we stand.

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Henrik Alveskog, Redeye AB, Research Division - Equity Analyst [9]

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Okay. All right. And then also, you said that the EBITA was a disappointment in IVS and partly related to this, but then also the ramp-up cost, et cetera. Are you actually saying that because I mean you are supposed to grow and ramp-up in this division, so are you -- are the revenues lagging while business -- while the costs are actually in line, is that how we should read it?

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

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That's a good question, Henrik. I think what's happening is that we have high -- I mean relative compared to revenue, high preparation cost in supporting a low volume of equipment that is currently generating revenues in the IVS segment. Remember that we just rolled out new equipment a few quarters ago, and we are hopeful that revenues will significantly increase over the next, say, 2 years. But that usually comes with the preparation cost and start-up cost, where we do pilot programs and demonstrations. And for those pilot programs and demonstrations, they are quite labor-intensive. Because we -- what we typically do is we have technicians out in the field assisting individual equipment to ensure success of those pilots and demonstrations and that we don't stumble over misuse of equipment or some other supplies. And these things are still ongoing. You could call this a preparation for future success and it's affecting our results. But as I said, over the next 2 years, we're quite hopeful that we can generate better than -- better results and better performance than -- certainly than what we've seen in the past.

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Henrik Alveskog, Redeye AB, Research Division - Equity Analyst [11]

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All right. Well, just a follow-up on the Swedish business and the numbers in this quarter, which I guess was the major surprise. When we look at this quarter and compare it to the second quarter of this year, your EBITA is on the same level while revenues are significantly lower. And while we know that for seasonal reasons your costs are lower in the third quarter compared to the second. Is that basically the reason why it looks like this time also? Or has there been any major changes related to your cost-cutting measures or rationalization? Or what you prefer to call it?

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

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So I think we do see effects from our cost-reduction efforts as you rightly pointed out. But in addition to that, by generating higher revenue per inspection, the gross margin per inspection, if you want to calculate that, is increased compared to prior quarters, right? So when we generate higher revenue per inspection that means the profitability of our inspection activities should go up. And that's what we -- it has 2 effects. One, when the volume is strong as expected or stronger than expected, actually, as we see in Q3, the margins are very nice. But it gives us better resilience against the downturn -- temporary seasonal downturn, which we may find in some of the upcoming quarters. I think that, overall, our position has improved. We've managed to maintain pricing in the market. We see less and less pressure from competition, less and less coupons and discounts that are being used, and I think it helps every player in the industry and, therefore, also helps Opus to be a more profitable and more successful organization.

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Operator [13]

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The next question is from the line of Mats Liss from Kepler.

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

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Well, I guess continue with the question there on Sweden, just to get a bit more flavor. I mean normally, the fourth quarter, as I see it, is somewhat better sales-wise than the third quarter. So I mean given your view here on pricing and savings, if that trend continues to the fourth quarter, it would probably look pretty much the same or slightly better. Or are the difference there in the interval still affecting you too much or it's difficult to say?

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

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Yes. It's a little difficult to say. But as you know, Mats, we're not doing forward-looking predictions and forecasts. But it is important for me to note that the comparability from quarter-to-quarter, I mean prior year to current year comparability is a little bit out of sync. Because inspection volume cannot be fully compared due to the 14-month interval. It's difficult to say, okay, we had a better quarter in Q3 2019 than Q3 2018, that's why Q4 should be better. A little bit of that is true in some sense because if we continue to be able to collect higher revenue per inspection that obviously has a long-term impact. And if we can continue to operate with our cost reductions that has a long-term impact. But I want to -- I do want to warn the listeners about a little bit of an unpredictability about volume. We are in a new phase after this adjustment, and the 14-month interval kind of throws off the predictability that we had in prior years. So it remains a little bit to be seen how Q4 is affected on, in particular, regarding inspection volume when you compare that to the prior year's quarter.

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

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Okay. Great. And about the Latin America there, have you sort of implemented price increases now that sort of balanced, well, more recent depreciation, depreciation on the peso or is it too early to see the impact in the fourth quarter? Will it be more of a next year event?

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

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Mats, I think we have been able to maintain good price increases in, let's say, with a little bit of a delay, but in general, in line with the FX changes. Remember, our price increases are based on inflation. They're not based on exchange rate, but based on inflation, inflation follows to some degree, at least in Argentina. I don't want to be an economist here. But at least in Argentina, follows the FX changes. So we do see -- we have received and continue to receive price increases that are in line with those changes. And as a result of that, the underlying, I do want to repeat that, the underlying profitability of the 3 concessions that we are operating in Argentina is good, granted the FX adjustments result in lower overall results, lower revenues, lower profitability, but the underlying margins continue to be good.

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

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Good. And finally, there about the IVS. You made the changes there with the consolidation of the different brands, do you do the same change in the customer interface? Or do you keep the brands separately there? Yes, I mean...

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

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Good question, Mats. So we have reported earlier this year about combining the 2 organizations. We have 2 primary organizations, AutoLogic and Drew Tech, and you see a combination. We have a single Head of Sales. We have a single Head of Engineering. We have a single President for the organization. And you see more and more a joining of efforts, and the branding of those companies into Opus IVS will just help support and solidify those internal efforts that we started earlier. If you were to call our hot lines, you will be greeted by, hello, this is Opus IVS today. So we have managed the integration of the entities under one brand name. And I think it will help us with name recognition and help us bring the organizations together and make them one and, therefore, stronger in the marketplace and more successful.

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

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Okay. And in IVS, you had a pretty strong fourth quarter last year. And I guess there are some sort of seasonal sales in the fourth quarter. Should we expect a similar situation this year? Or could you say something there? And end of the year sales...

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

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I -- I'm sorry, go ahead.

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

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I mean you see some end of the year sales impacting the IVS area, I guess at least you did last year, should we expect the same situation this year?

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

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Yes. So we don't really make predictions and forecasts. But typically, when you see a one-off sales impact, that's not repeatable. It would have to be a coincidence that we hit the same quarter with one-off revenue increases as we had in Q4 in IVS last year. Those are -- unfortunately, if they're one-offs then they are not typically repeatable.

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Operator [24]

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(Operator Instructions) We do not have any questions now. Sir, please continue.

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

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Okay. Thank you. Thank you, Paul. Helene, do we have any more questions from the Internet?

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Helene Carlson, Opus Group AB (publ) - Director of Corporate Communications & IR [26]

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No, no questions.

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Lothar Geilen, Opus Group AB (publ) - CEO & President [27]

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Okay. Thank you. Thank you, everyone. Thank you for joining Opus Q3 interim report, and thank you for your interest in our company. I look forward to talking to you all in 90 days from now. Thank you. Have a good day, and talk to you soon.

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Operator [28]

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Thank you. That concludes our conference for today. You may all disconnect. Thank you all for participating. Speakers, kindly stand by.