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Edited Transcript of RATO B.ST earnings conference call or presentation 5-Nov-19 9:00am GMT

Q3 2019 Ratos AB Earnings Call

Stockholm Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Ratos AB earnings conference call or presentation Tuesday, November 5, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Helene Gustafsson

Ratos AB (publ) - Head of IR & Press

* Jonas Wiström

Ratos AB (publ) - CEO, President & Director

* Peter Wallin

Ratos AB (publ) - CFO & Business Area President of Construction & Services

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Conference Call Participants

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* Mikael Löfdahl

Carnegie Investment Bank AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Ratos Interim Report January to September 2019. Today, I am pleased to present Jonas Wiström, CEO; Helene Gustafsson, Head of IR and Press; and Peter Wallin, CFO. (Operator Instructions)

Speakers, please begin.

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Helene Gustafsson, Ratos AB (publ) - Head of IR & Press [2]

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Good morning, everyone, and welcome to today's telephone conference where Ratos' CEO, Jonas Wiström, and Ratos' CFO, Peter Wallin, will present Ratos Q3 results. After the presentation, a Q&A session will follow.

Now, I leave the word over to Jonas Wiström. Please turn to Slide 2 in the presentation.

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [3]

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Thank you, Helene, and good morning and thank you for all of you attending this morning call. I'm as usual looking forward to present the numbers for our third quarter. And we will, at this call, focus on the performance in the company group, our portfolio companies and our financial position.

In just a few days, the 13th of November, we will have our Capital Market Day, where we will present where the Ratos Group is heading, our strategy and operational model to get there, and also spend quite some time to dig deeper into our companies.

Now let's move over to Slide #3, which contains the highlights of the third quarter.

I would like to start with saying that the third quarter includes a capital gain on SEK 487 million as a result of our divestment of our headquarter property. That is one-off effect on our group EBITDA. But in this call, we will, as usual, only focus on the group of companies and the results and growth for those in our 3 business areas.

As you know, during the last 1.5 years, we have focused solely on our existing group of companies using our philosophy to achieve the stability before profitability and profitability before growth. And quite a few -- quite some actions have been taken, including the change of the CEO in 6 [of the] companies and the Chairman in 9 out of 12 companies. And I'm really pleased to see that this continues to generate results.

The most important actions in Q3, I think, was the divestment of Plantasjen subsidiary, Spira. That contract was signed during Q3. During Q3, also new CEO to LEDiL was recruited, who will start in December. And in Plantasjen, Olav will start -- or actually started in the end of September as the CEO of Plantasjen. That is also very important for the future.

So let's go into the numbers. The sales increased by 17%. And the organic growth was 16% in a quarter where the FX effects were 0. Main contributors to this growth were Aibel and HENT and Diab, which will be commented on later in this presentation. But it's important to note that 10 out of 12 companies actually showed organic growth in the quarter.

As you know, our group of companies is spread over industries and markets, and we are all, of course, very interested of the macroeconomic uncertainty. But in this quarter, we have, so far, not -- yet not seen any effects of this uncertainty in the macro economy.

EBITA increased in the company portfolio from SEK 120 million up to SEK 302 million. It's -- some real main contributors there as well, as we will come back to, but it's good to see that 10 out of 12 companies actually improved their EBITA in the quarter.

Plantasjen, again, we divested the Spira subsidiary, this will improve earnings, and it actually improves earnings on a pro forma basis. In the next -- or in this quarter, in Q4, we will have a one-off effect of SEK 30 million because of this divestment.

Diab had also a material big contract for Vestas, which we estimate to have value of SEK 2.2 billion to -- SEK 2 billion to SEK 2.5 billion over 5 years. In this quarter, we have just minor effects on this contract that will kick in, in 2020 and '21. And we have a continuous improvement in our operating cash flow, which Peter will return to later. Peter will also return to the very important event in the quarter that -- or actually after the quarter that Aibel signed a major offshore wind contract.

And so with that, let's turn over to Slide 4. There, we show our organization, which I think most of you are familiar with. And the Construction & Services, it marks the largest business area with a rolling 12-month sales of SEK 11.5 million.

And so let's move over to next slide, which is Construction & Services. And Peter, as the CFO, is heading up this business area. And I leave the word over to you, Peter.

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Peter Wallin, Ratos AB (publ) - CFO & Business Area President of Construction & Services [4]

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Thank you, Jonas. Construction & Services posted revenue [Ratos'] share of SEK 3.1 billion for the quarter, and that equates to a growth by 27%. Most of this is, is of course, organic.

If you look on the EBITA in the quarter, it rose by 26%, so almost in line with the growth in net sales to SEK 140 million. The main contributors for this growth is, by far, Aibel, and then we have the Speed as well also leading to the accretive situation on the EBITDA.

So let me go to company by company. And you can see the stellar performance of Aibel and a very high-growth rate of 62% in the quarter. And this is, of course, thanks to the many good order bookings that Aibel has done over the past 1.5 years, 2 years. Now they are starting to produce many of those orders, and that also means that they are increasing EBITA by 41% to NOK 211 million on a company level.

So then you might ask yourself, okay, you have net sales growing at 62% and EBITA growing at 41%. And the reason for this is that sometimes, the order booking backlog and the production of the order backlog is in a quite early stage, which is the case. Aibel secures very big projects over many years, and there's a lot of things to cover over those years. So early on, they are quite cautious in profit take. And that's why you can see that the margin is dropping somewhat.

If you compare that to Q3 last year, it was the opposite. They were then concluding a number of projects and releasing profit, thus improving margin. So this is the way a well-run project business is run according to my experience.

A very important -- a continued important strategy of Aibel is to grow within the offshore wind. And as you saw after the close of the period, Aibel secured a project together with Keppel FELS -- sorry, a loan to Equinor alongside them with the already secured win of DolWin 5, which they did together with Keppel FELS. So the Equinor and SSE project that they secured now will be booked into the order bookings in the fourth quarter. And we can say that it's a material value, and in Aibel sense, that means it's over and about 20 -- NOK 2.5 billion in order bookings. So the offshore wind is growing as a segment for Aibel big time.

Going over to airteam. airteam posted a smaller growth of 2% organically and because of the major component of the growth in the Swedish business is the acquisition of Creovent & Thorszelius, which we did in the beginning of the year. And the EBITA amounted to SEK 19 million, which is an improvement over last year.

And the same is true, as we have seen in the previous quarter, namely that the Danish business is stable and growing. EBITA and margin is growing in the same -- to the same degree. And the Swedish business is somewhat in a turnaround situation, and which is something which we are working with right now. The order bookings is good, and they are -- the order backlog is very strong, especially in the Danish business, which is the major bulk of the business.

Going over to HENT, which increased by 18% in the quarter and posted a EBITA of SEK 38 million, which is along the line of the last year. And the margin is somewhat lower than last year, and that this is, of course, due to the fact that some of the projects are now reported at the [sale] margin after the write-downs we have done in Q2 and previous quarters. And it's good to see the increasing stability in the business, and we are, of course, working very much of continuing to increase the stability in the HENT business.

Speed then last -- least -- and least, but perhaps one of the bigger positives in this business area is Speed, which is delivering increasing stability and also delivering on the restructuring, which was done at the back end of the second quarter. The group now is operating with a somewhat lower business volume but increasing profitability.

So that's on Construction & Services. Over to you, Jonas.

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [5]

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Thank you, Peter. And it's so great to see the development of Aibel and, as you said, also the Speed. I think they both did a terrific performance in the quarter.

Yes. Let's move over to Slide 6, where we have Consumer & Technology. The sales increased by 4%, all organic. EBITA increased with some 55% from SEK 31 million to SEK 48 million.

If we take a look down in the companies. Bisnode, during the spring in Q1 and Q2, we talked about Bisnode spending money on speeding up the transformation. And we stated that we hope to see the first sign in the fall. And it's good to see the first signs of this as EBITA actually improved 11% from SEK 72 million to SEK 80 million. The growth, which is up 2%. They are also catching up with the year-to-date numbers with this quarter.

KVD who's -- had a strong development this year. The year-to-date numbers are actually up from SEK 3 million to SEK 19 million, and the quarter is up from SEK 8 million to SEK 10 million. When we look at the Q3, we should remember that last year's summer included government initiatives, which really increased the new car sales. So with this in mind, I think the profitability and sales improvement in Q3 is actually well done by the team in the KVD.

Oase Outdoors, we have talked about the problems we had in the manufacturing. Our suppliers for the manufacturing process have had quality problems, has costed Oase a lot of money during the year. Now we have taken the final cost for that, which makes that the Q3 quarter, which is always weak even for a good year in Oase, is down SEK 3 million.

Plantasjen is the main contributor to the fact that net sales increased by 4%. Plantasjen grew 6% in the quarter. And Q3 is a loss quarter for Plantasjen, but the EBITA is anyway improved. And if we look at the year-to-date numbers, Plantasjen is ahead of previous year with SEK 29 million.

So let's then move over to business area, Industry, and that is on Slide 8 -- 7, sorry. Thank you, Helene. In the Industry business area, the sales grew by 12%. Again, all organic. And EBITA increased from a negative result to a positive EBITA of SEK 114 million, and that's primarily driven by Diab and HL Display.

Starting with Diab. 27% organic growth in the quarter. We are quite satisfied with that and what the management team in Diab is performing. As you know, last year was a loss year -- a loss quarter, and the year so far is -- year-to-date results so far is SEK 144 million, compared to minus SEK 70 million last year.

Why is this happening? We will dig this -- deeper into this on the Capital Market Day, the 13th of November. But yet, again, good performance. The year-to-date numbers are up from SEK 73 million to SEK 106 million.

A lot of things is happening in HL Display. And also, this company will be displayed at our Capital Market Day, and you will hear more from Nina about what's driving the good progress in HL Display.

LEDiL has had a tougher year. LEDiL, which is our most profitable company, is seeing our EBITA down actually year-to-date, with 25%. This quarter, EBITA was down 14% to SEK 19 million, compared to SEK 22 million for Q3 2019. In LEDiL, we have taken actions to reduce costs and, most importantly, recruited a new CEO with a strong track record and who will join us in December this year.

TFS. TFS is growing their sales with 4%. They are growing the EBITA -- TFS had a loss year and a loss quarter. Today, numbers are improved, both in the quarter and year-to-date. But there is a lot of things that is going on in TFS. And a lot of things has to still to be done to get this company up to the profitability levels where they should be. This market is a very strong market, growing 6%, 7% organically year-on-year. But all in all, a good quarter for business area, Industry.

And now again, I want to leave the word to you, Peter, to discuss our financial position.

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Peter Wallin, Ratos AB (publ) - CFO & Business Area President of Construction & Services [6]

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Thank you, Jonas. The cash flow from operation is continuously improving. And when we say this, I just want to be clear, we do not include the sale of the property in that number.

So then you might look at the interest-bearing net debt and see that it's almost changed over a year -- unchanged compared to a year ago. And then you might ask yourself, so why -- where do we see that the cash flow from operation is improving.

Well, the cash flow from operations is improving, if you look on the number and then I look on the year-to-date numbers. In addition, on the other hand, you have cash flow from financing and then currency translation impact, which both of them impact the net debt negatively. And then, of course, at the back end, if you look on the net debt, the sale proceeds of the property is improving the cash position. So those are the components on creating a status quo on the interest-bearing net debt.

If you look into the various companies, you can see that we are improving the interest -- the leverage in a major part of the companies. And I would like to point out the continuous improvement in Aibel, in Bisnode, in HL Display, in KVD and also in TFS.

Then when it comes to airteam, then the increase of the invested assets, of course, due to the fact that they acquired a company in the beginning of the year, a bolt-on acquisition.

And then Diab is tremendously improved coming from a negative position. And when the negative Q4 of last year is out of the rolling 12-month number, you're going to see the improvement big time. So there, you're going to see a good thing.

And then in Speed, they are, of course, impacted by the one-off charge, which was taken in second quarter. And they will getting their head over and above the 0 level and then improving from there.

Then, of course, finally, also net debt, if you look on a line-by-line basis, the Plantasjen and Diab numbers is also impacted by the injection of capital, which we did in the beginning of the year in those 2 companies. Overall, we are improving step by step.

Jonas?

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [7]

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So lower gearing in 10 out of 12 company, Peter.

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Peter Wallin, Ratos AB (publ) - CFO & Business Area President of Construction & Services [8]

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Correct.

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [9]

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That's good news. So then let's move over to our last slide, which is #9.

Well, to summarize the quarter, again, we're happy to see that all the actions taken by our great people in the companies and in Ratos are really yielding results.

We'll continue to drive the results in the companies. Our aim is that each company should have a leading profitability in their sectors. When we compare their results with their peers, the Ratos companies should be #1 in profitability.

We have, third, we improved our financial position. And last but not least, I will come back to some marketing for our Capital Markets Day on November 13.

Thank you, Helene. That was, I think, all we have to say right now, and we can open up for questions maybe.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mikael Löfdahl from Carnegie.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [2]

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Yes. So sorry to have to ask a question on something that I find a bit negative. Otherwise, things are moving in the right direction, definitely. But looking at the indebtedness of Plantasjen, can you say something about that? I mean, the earnings are improving somewhat, but the debt is at a very high level in regards to earnings, still, even though you have injected capital earlier this year. So that's one thing.

And the other thing on Plantasjen, what -- is there any plan in the making to sort of restore profitability? And now I'm talking about how it was when you acquired the company not that long ago. Or is that too early to say given that new the CEO is quite fresh on the job?

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [3]

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Thank you, Mikael. I don't think that was a negative question. I think that is a very valid question. The gearing is too high in Plantasjen because the results are too low, and the results are too low because gross margin are too low and OpEx are too high. But we -- and I think we see a company that's been very top line oriented. And it's good to see that Plantasjen is in a sector -- I mean, I think many people think Plantasjen is a retail company, and we hear every day about the retail crisis. But sales are actually increasing in Plantasjen and the market itself is growing. What we have to do and what Olav is on the way is to improve profitability in Plantasjen.

And I don't know, Peter, if you want to say anything about the debt as such.

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Peter Wallin, Ratos AB (publ) - CFO & Business Area President of Construction & Services [4]

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Nothing more than you have said. The indebtedness is too high. And of course, plans are in the making of improving profitability big time. So I would like to leave it at that.

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [5]

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Yes. We are certainly not satisfied with the earnings from Plantasjen. We're satisfied with the sales, but not with the earnings.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [6]

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Is it possible to comment on the cash flow and the seasonality of cash flow in Plantasjen? It's been a bit difficult to track given other difficulties for the company. But typically, if we look at the last quarter of the calendar year, is that typically a good cash flow quarter? Or will the debt level remain at these levels or even increase in the next quarter?

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Peter Wallin, Ratos AB (publ) - CFO & Business Area President of Construction & Services [7]

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I would say that the major inflow is, of course, in the Q2 and in Q3, and then you start to see a dwindling impact on Q4. But the [bigger] cash flow out is in the first quarter.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [8]

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Okay. And obviously, in this quarter as well. But what about the refinancing need? Or how is the debt structure in Plantasjen? I mean you made a capital injection earlier this year. But clearly, the debt level is, in my view at least, still too high. So what are -- when are loans up for renewal and so on? Can you comment on that?

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Peter Wallin, Ratos AB (publ) - CFO & Business Area President of Construction & Services [9]

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Of course, this is a continuous discussion that we are having. And as we are also noting in the footnotes into the report and which we also did in the second quarter, we are in a discussion with the banks and the bank syndicates that we have in Plantasjen. But it's far too early to address this to the market. We rather conclude discussion with the banks before addressing the outcome of it.

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Mikael Löfdahl, Carnegie Investment Bank AB, Research Division - Research Analyst [10]

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Okay. Another question on Diab and Aibel, is it possible to comment on the order books and how -- if you look at previous contract deliveries versus the order book now, anything on profitability that you can comment on your expectations on the profitability of the current order book versus what you've had in the past? And perhaps mainly in Aibel then, which is obviously very big orders.

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [11]

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Yes. Should you start maybe with Aibel and I can comment a little bit about Diab?

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Peter Wallin, Ratos AB (publ) - CFO & Business Area President of Construction & Services [12]

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A becomes -- comes before D in the alphabet according to my...

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [13]

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That's correct.

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Peter Wallin, Ratos AB (publ) - CFO & Business Area President of Construction & Services [14]

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That's good. So Mikael, the market right now is quite hot when it comes to the big offshore wind projects. And also, the market that Aibel is acting on has improved immensely over a couple of years. So the pricing has started to come up. So we look very favorably towards the profitability in the backlog. And Aibel is a company which are doing a very thought-through and structured approach and are selecting the targets for tenders very seriously. So I'm very [positive] towards the profitability in the backlog.

I would like to put in a caveat, and that is, of course, that the margin should be high given the type of projects that Aibel is delivering. And it still remains to be seen that they can deliver full-fledged on this project. So with that caveat, I'm sort of, of course, very pleased.

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [15]

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Thank you, Peter. And also the fact that a substantial -- we shouldn't take away Mad's presentation at the Capital Markets Day about this. But it's great to see also that, as we stated in the report, that the backlog is not only big, it's also a significant proportion into renewable energy, which is great.

Coming to Diab, who will also be on the Capital Market Day and talk about the order backlog, et cetera, we have never talked about that in the reports. And we might do this in the future. Because, as you know, Diab has been quite cyclical over the years, quite sensitive for the cycle. And I can disclose so much that I can say that, for the first time, Diab has an order book that stretch into several years ahead and is in a good -- very good position when it comes to order backlog. But more news about that on the 13th of November.

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Operator [16]

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(Operator Instructions) And as there are no further questions, I will hand the word back to the speakers for any final comments.

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [17]

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Then we just want to say thank you so much for listening into this conference and for the nice questions from Mikael. And nothing more from us, Helene?

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Helene Gustafsson, Ratos AB (publ) - Head of IR & Press [18]

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No, nothing more for us. And if you would like to enroll to our Capital Markets Day, you can do that on Ratos' website. Thank you very much.

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Jonas Wiström, Ratos AB (publ) - CEO, President & Director [19]

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Thank you very much.

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Operator [20]

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