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Edited Transcript of RESURS.ST earnings conference call or presentation 23-Jul-19 7:00am GMT

Q2 2019 Resurs Holding AB (publ) Earnings Call

HELSINGBORG Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Resurs Holding AB (publ) earnings conference call or presentation Tuesday, July 23, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Peter Rosén

Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR

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Conference Call Participants

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* Patrik Brattelius

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Peter Kessiakoff

SEB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the Q2 report for 2019 for Resurs Holding. We have CFO, Peter Rosén with us. (Operator Instructions) Peter, you have the floor.

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [2]

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Thank you very much. And good morning, welcome to this Q2 presentation. I thought we'd start from the very beginning.

And Page 1, we are continuing with yet another quarter showing strong growth, up by 14% compared to Q2 2018. We see strong growth from both our bank segments and in all of our markets. In particular, we find it very rewarding that the core of our business, Payment Solutions, continues to show higher growth than we've seen previously.

At the same time, this is also a quarter, which is characterized by tougher competition in Norway compared to last year when it comes to Consumer Loans and hence, lower margins for us. However, there's no major difference compared to Q1 2019, possibly it's a little bit up from that quarter. We compensate to a great extent, with a lower C/I ratio and we deliver result, which is up by 8% in increased net income compared to last year and I will get back to this in more detail at a later point in my presentation today.

Turning over to the next slide, let's have a look at the different segments, starting with Payment Solutions. We are growing by 11% in reported currencies and also up by 11% in constant currency. This is in line with the growth we saw in the first quarter of this year and it is the highest we've seen over a longer period. The growth is driven mainly by existing partnerships and it is visible in all our markets. It's particularly rewarding to note that in spite of tough competition, both Mio and Bauhaus opted to continue and strengthen their Corporation partnerships with us. So we continue to develop the Omni Corporation in particular. And we continue, of course, to develop our business in the area of product such as the push function in Resurs. Checkout, which is still gaining a great deal of interest from existing partners and others in the market alike.

Moving on to have a look at our second bank segment, Consumer Loans. We continue to deliver strong growth to the tune of 16% growth in the loan book, lending in all markets contribute to this growth. However, Sweden still represents the greatest percentage in actual numbers and Finland, the greatest percentage-based increase.

I'll get back to this in some more detail, but it is a quarter which is characterized by growing competition in Norway and this is bringing pressure to bear on our margins in this segment. However, the margins for Norway remain unchanged at the same level as they were in Q1 2019.

As we mentioned, during Q1, we plan to implement a number of activities to face these in this new margin situation interest net rate increases, cost efficiency improvements and organizational changes and they've all been implemented now during the second quarter.

Moving on to the third segment, Insurance business. We continue to see a stable development with an increase in premiums earned net by 7% and the technical result improved by 14%, it's entirely in line with the strategy we've opted for over the last few years focusing on our core business and at the same time improving the key ratios to bring the results and the earnings up further.

During the quarter, we signed new partnerships in the different markets and we also saw an acquisition that was implemented during this quarter.

Now let's have a look at the more detailed financials of how we have performed.

As I just mentioned, lending is up by 14% and net income up by 8% to just over SEK 310 million.

In terms of our net income, this is the best ever for us.

If we then have a look at the evolution for our loan book in the different segments, we see that we have a reported increase by 14% in reported currency, more or less, on par -- the same as in constant currencies. And it's very rewarding to see that Payment Solutions, the core of our operations is growing more rapidly than we've seen over the past few years, up by 11%.

And if we look at the distribution between offline and online volume, approximately 30% of our sales volume comes via the online channel, more or less the same level as we've seen over the past year.

Growth is mainly driven by the fact that volumes are up with existing partners, but we also continue to sign new partnerships, setting us up for continued growth as we move forward.

Consumer Loans continue to see a stable growth with high numbers, now an increase by 16%. This is in line with what we've seen over an extended period now. All markets contribute with growth even those in Sweden in absolute numbers represent the greatest increase and Finland represents the greatest increase if you look at it from a percentage perspective in relative terms.

And if we continue to look at the development in income, we saw a growth in operating income of 5% during the quarter compared to the previous quarter -- the same quarter last year and they are in accumulated numbers up by 8% compared to 2018.

Let's have a look at the NBI margin. It's down by -- compared to last year. This drop is mainly driven by Consumer Loans and competition in Norway, which has increased.

And now that the new regulatory framework from 2017 is coming to force in Norway, we see how the final competitors are making adjustments and the competition for the Norwegian lending volumes is up. We see a continued demand for loans, but there is no doubt that several of our competitors are chasing after these volumes and this is bringing a downward pressure on margins. The NBI margin remained stable compared to Q1 2019. So no change there.

And if we then have a look at the cost side, the operating expenses and how they developed during the second quarter this year. The expenses amounted to SEK 361 million, down by 2% compared to the same quarter last year.

Even if we continue to focus mainly on IT, we've still reduced our costs, specifically in Norway and we've also continued to remain, generally speaking, very focused on our costs. The reduction in Norway is mainly intended to face the drop in margins that we see in lending in Norway. And this means that the C/I ratio continues to improve over time and for this quarter, we're at 39%. This is a considerable improvement to the tune of 260 points compared to Q2 2018.

And on an accumulated basis, we are now 160 points under the same period last year. And this shows that our business model has a scalability feature, which we use fully.

And let's turn the page and go to Page 11 to look at credit losses. They amounted for the quarter to SEK 148 million, which is an increase compared to last year. And that is mainly driven by growth in the loan book.

Cost of risk amounted to 2% for the quarter and is at the same level as last year and we see still a continued debt collection transfers in Norway compared to 2018 but other parts show a lower cost of risk and if we look at the entire loan book, we have stabled the credit quality and specifically talking about Norway, we see that debt collection transfers are down compared to Q1 2019.

Then let's continue to Page 12 where we have the risk-adjusted NBI, it's up 3%, while the risk-adjusted NBI margin is lower compared to last year, mainly due to the lower margin in Consumer Loans in Norway. However, it's stable compared to Q1 this year.

And we will then continue in more detail with the segments. We have this on Page 13, where we have Payment Solutions. We have a strong growth with 11% compared to the same quarter last year, that is what we've seen this year and then the NBI margin is at around 15% (sic) [13.9%] which is somewhat below last year's same period and that's driven by the customer mix.

Credit losses are down compared to Q2 2018, which means that the risk-adjusted NBI margin is up with the 20 points compared to last year. And this is also an increase compared to Q1 this year.

And if we continue, Page 14. And Consumer Loans, we have, in this segment, again, strong growth with contributions from all countries, the NBI margin is down compared to last year and that is mainly due to increased competition in Norway. Our evaluation is that all competitors now have adapted to the rules, the framework, that has become law and that, in combination with an increased competition for lending volume, is pushing prices and margins in the Norwegian market.

Credit losses are up compared to last year and that is mainly driven by debt collection transfers in Norway. Overall, we see that the risk-adjusted margin is down compared to last year, but it is at the same level as Q1 2019.

If we then continue and turn the page to Page 15, where we have the insurance business, we have growth in premiums earned with 7% and we have an improved combined ratio to just over 90%, which is a good increase of the technical result as well with 11% and the improved combined ratio is mainly because of a better loss ratio.

And if we continue to Page 16 where we have the capital position, we see that we have a strong capital position with CET1 and total capital ratios that are with good margins above regulatory requirements and our own targets. And we have CET1 of around 13% and total capital ratio around 15%.

If we then continue with Page 17, where we have funding or financing, we have the same financing structure as in 2018 and also beginning of 2019 with well-diversified financing and this last year we have a SEK 1.3 billion that we have in our MTN program.

And then if we turn the page again to Page 18, we look at how we have performed relative to our financial targets. We are below the target when it comes to risk-adjusted NBI margin and this is due to the competitive situation in Norway, but we deliver on or above all other financial targets and not least we have an RoTE of around 35%, which is with the good margin above our financial targets.

And that concludes the presentation as such and I'll be happy to answer questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Patrik Brattelius from ABG has the first question.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [2]

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I have a few questions. Let's start with the price increase in Norway. Have you seen an impact of that in terms of how customers have reacted? Have you lost customers, for example? Or did they stay with you? And what is to be expected in terms of an impact on the margin in Q3?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [3]

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Price increase implemented in June -- during the month of June, and it's a little bit early, therefore, to say very much about how customers will respond. But if you look at the reaction so far, in June, we didn't see any particular reaction. And that's very positive. If that continues, it means that we've been able to push through this price increase without any major negative impact from our customers, but it's only the first month so far. It's too early to produce a forecast. But the first step is looking promising. As to the extent of an impact in Q3 and moving forward, it's difficult to summarize. But we expect a positive impact starting in Q3.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [4]

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Okay. And how did you decide in terms of lending in this quarter? Because if I look at your loan book mix and the split per country for Q4 in 2018, 1/3 or so is allocated to Norway. How -- what have you decided to do in terms of growing during the second quarter? Are you focusing mainly on Norway and Sweden? Or nothing -- hardly anything in Norway. What's the split?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [5]

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If you look at the growth in our loan book, if you look in absolute terms, Sweden represents the largest share and in terms of percentages, Finland is up the most. Norway is increasing but at much lower levels. And the reason why they are growing at lower levels is because we want to strike the right balance between lending and the margin we can get on the lending we provide. And the way things stand right now in the Norwegian market, we choose to focus on profitability. But we still want to have growth in Norway, we believe in the market from a more long-term perspective and we want to remain in place, remain active not least because it's a market, which is highly characterized by brokered business. So you have to be very active. But we focus -- there's more focus on growth in the other markets right now.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [6]

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Okay. And what about the actual workings in concrete terms in Norway? Are you taking or dealing with some of the customers who are willing to pay the price that you are prepared to offer them? Or is it rather that you're, sort of, doing a push here and there, trying to squeeze yourself into the market and maybe lend out more money some months than other months? How do you go about this?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [7]

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Well, we have a more even pace of lending than that. We don't do specific -- take specific measures for 1 week or 2 and then pull back a little bit. We keep up an even level. One positive aspect we've noticed recently is that our so-called win rate is up. Even though we've implemented a price increase in the month of June, we say that the win rate is up. That means that relatively speaking, we're getting more of a share of the lending than we used to. So that's a positive factor. Now exactly how this equates to margins and the growth in the loan book? It's hard to summarize at this point, but it's a positive signal.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [8]

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And can you say anything about which competitors are losing out in this, in your improved win rate? Are some of the bigger banks like DNB coming into the Norwegian market. Can you tell?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [9]

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No. We're not able to determine who's gaining the margin. We say that relatively speaking, we're doing better.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [10]

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Okay. And then just one final question on that point. I was wondering if you could be a little bit more specific and tell us about what you specified as another operational expense, why were the numbers so low in Q2 and is this a new level that we can expect from you in the future? Or if it's a nonrecurring impact for the second quarter only? What should we think?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [11]

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Well, the cost -- the expenses they are mainly marketing related costs in fact. And if we look at the movements that's dropped compared to last year and the drop is specifically driven by the fact that we held back on marketing in Norway. This was a deliberate choice due to the lower margins in Norway and it's not profitable for us to invest as much as we have in previous years. So that's one explanation why, in concrete terms, we have a drop in our costs in absolute numbers. If we then look at our C/I ratio, which is improving, it is on the one hand explained by the fact that we have lower marketing costs in Norway, however, also by the fact that our costs in relation to lending at lower level. So for example, if we look at payroll costs, generally for our people they are more or less at an unchanged level compared to Q2 2018 or as our loan book is up considerably. So it's a combination of 2 factors, specific measures to reduce marketing in Norway in terms of costs and some other costs in Norway, and then a general improvement of our C/I ratio.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [12]

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Then hypothetically if there is a less competition in Norway, would you start to increase marketing measures again, so you would see higher expenses?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [13]

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Well, over time, if we see better competitive situation so that we have a chance to increase volume, it's likely that we'll invest more in marketing, however, we do not expect that to happen in the short-term. We feel that the Norwegian market is now adapting to the new situation and our competitors will have to do that as well. So in the short term, you shouldn't expect us to invest more. But thinking about margins and if it will be profitable to invest a bit more in marketing, we will.

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Operator [14]

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And our next question is from Peter Kessiakoff from SEB.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [15]

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Just some follow-up questions relating to costs. If we look at personnel, personnel is down 5% and we see seasonal adjustments, of course, but this year, we also see that you have more people employed, and of course, you have some extra employees in Q2, admittedly, but is this a change in research as to how many people you need? Or is it something that is more temporary and it has to do with the pressure on margins? And what do you expect when it comes to increasing the numbers of employees?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [16]

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Well, over time, I think that you should expect us to increase the number of employees. Compared to last year, we have a decrease and if we look at the numbers that is mainly due to the changes we have in business support. And that is because we have quite a high turnover in people in that area, not to the least because we have many employees who are, well, younger and they work for a couple of years, they take a break from studies, for example, and then they leave and that is -- that means that we have to re-recruit and now we have decided to be a bit careful when it comes to recruiting people. And that is because we feel that we can manage more volumes within the numbers that we have. But we are taking things slowly, easy. We have no decision that we are to decrease the numbers, we have seen an opportunity to not recruit or re-recruit as much. But there is no change in the trend at all. We were taking things easy.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [17]

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Okay. And then the margins and your targets. You mentioned this yourself that you did not reach target. And with the changes in Norway, do you expect to be able to, towards the end of the year, reach the target you have for margins or not? Is there a risk that you will need to adjust that target?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [18]

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Well, I'm not sure we will reach the target towards the end of the year and that depends on price increases in Norway, how positive those changes will be and the same thing goes for other changes that will be carried out. But I'm not sure we'll reach that target towards the end of the year. But we are there when it comes to all other financial targets, not least the C/I ratio.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [19]

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And then a final question, you mentioned and you write that Solid made an acquisition this quarter and I do understand that you do not want to say too much, but could you give us any numbers as to how much that contributed in the quarter income, et cetera?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [20]

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No. This quarter, basically, nothing because this acquisition was made in this quarter. And you have to see this as, well, apart of us as strengthening the Solid performance. And it's not going to change anything dramatically. But we'll see an improvement in the technical result and it will become stronger.

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Operator [21]

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(Operator Instructions) And the next question comes from [Ulreich Sotoya] from Danske Bank.

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Unidentified Analyst, [22]

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This is okay?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [23]

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That's fine.

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Unidentified Analyst, [24]

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I was just wondering because I see that your provision against Stage 3 loans is trending slightly downward and I was wondering what markets are -- is this across-the-board or only ex-Norway or how should we view this? How far down can it go?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [25]

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I'm going to respond to this question in Swedish. If we look at the provisions for Stage 3, we don't provide details on the specific particular market this refers to. But generally speaking, we're a little -- it's a little bit lower in all our markets, it's not specifically related to Norway. As for how far down we can move, it's hard to say very much, but we make continual assessments about the levels where we want to make provisions. So this is the level we're comfortable with when it comes to provisions currently and now we'll have to see where that pans out for the future.

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Unidentified Analyst, [26]

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And one other thing, also the debt register in Norway, is that fully operational now?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [27]

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Yes. That's correct. It is.

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Unidentified Analyst, [28]

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Have you discovered any -- like what is the risk here that your clients, people loan money from you but they have several loans, like, for example, they have a loan with you, they have a loan with another -- DNB, they have a loan with Bank Norwegian and so forth. Is there any risk that you have to make changes to your credit model based on this?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [29]

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Well, it is possible that we may make adaptations, as we gain more information we may adapt some of our credit templates. So in that sense, it's only positive the fact that there is now such a debt register.

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Unidentified Analyst, [30]

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Last question. Have you noticed any -- when you do the check of the clients coming in, now in July, have you discovered an unusual large amount of them took several loans or larger debt burden than your old model which you assumed or...

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [31]

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The information we have access to and you need to bear in mind that this is something that came into force on the 1st of July is not something that so far has changed our opinion on the customers.

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Operator [32]

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And a follow-up question from Patrik Brattelius from ABG.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [33]

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I will continue with a few questions. And I'm thinking about the latest status when it comes to the repurchase mandate. Let's start with that.

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [34]

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Well, we have an approval from the Financial Supervisory Authority for that repurchases so it's now with the board that will evaluate if and when.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [35]

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Such a decision from the board would that information be sent out?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [36]

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Yes.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [37]

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And then I'm thinking about this with the renewed contract. Well, you're writing about this in the report as well with Mio and Bauhaus this renewed contracts, how will they have impact on profitability? Are they more profitable than the old ones? Or is it the other way around? Is this something where they have put pressure on prices when renewing the contracts? Do you have other bigger contract that will be renegotiated this year?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [38]

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We're not going to comment on profitability on specific customers. We're not going into any detail there. But let me say that we're very happy that Mio and Bauhaus are not just renewing contracts but -- that we now have a more in-depth collaboration and we, of course, believe that this will be positive, that it will give us more volumes and over time better profitability as well. So we think it's very positive. There is no other major big contract this year that will be renegotiated.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [39]

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Okay. Would it be unreasonable to imagine that these new contracts are well, generally speaking, that new contracts are less profitable but would indicate that a new contract is more profitable than an old one?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [40]

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Well, that it would give more volume and thereby contribute to our result.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [41]

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Okay. And then another question about the countercyclical buffer increase in Norway and Sweden. How that will impact?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [42]

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Well it's already included in our forecasts and we feel very comfortable with that and we see no reason due to those changes, to make any changes to our financial targets or our working methods. This is something that we have planned for. This is what we've been aware of for a long time.

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Patrik Brattelius, ABG Sundal Collier Holding ASA, Research Division - Analyst [43]

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And what do you expect to see on your capital and your capital coverage? What impact will it have?

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [44]

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Well perhaps we can talk about that this fall when that will have entered into force then we can be more specific.

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Operator [45]

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We have no further requests for the floor registered right now. So I'm going to give the floor back to the speaker for any closing remarks.

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Peter Rosén, Resurs Holding AB (publ) - Deputy CEO, CFO & Head of IR [46]

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Thank you very much, and thank you for joining this Q2 report. I wish you a pleasant day and a continued pleasant summer and holidays for those of you who are getting ready for some time off.

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Operator [47]

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Thank you. This concludes today's call. Thank you to all participants.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]