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Edited Transcript of SILMA.HE earnings conference call or presentation 16-Aug-19 7:30am GMT

Q2 2019 Silmaasema Oyj Earnings Call

Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Silmaasema Oyj earnings conference call or presentation Friday, August 16, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jussi Salminen

Silmäasema Oyj - CEO

* Mikko Merisaari

Silmäasema Oyj - Acting Head of Communications & IR

* Sari Nordblad

Silmäasema Oyj - CFO

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Conference Call Participants

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* Sami Sarkamies

Nordea Markets, Research Division - Senior Analyst of TMT

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Presentation

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Mikko Merisaari, Silmäasema Oyj - Acting Head of Communications & IR [1]

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So good morning, ladies and gentlemen. Welcome to Silmäasema January-June earnings call and audiocast. My name is Mikko Merisaari, and I am Head of IR and Communications here with Silmäasema. In a few minutes, CEO, Jussi Salminen; and CFO, Sari Nordblad, will go through the results presentation. There will be time for questions after the presentation. (Operator Instructions)

So I think we're all set to begin, so I'll hand over to Jussi and Sari. And Jussi, please go ahead.

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Jussi Salminen, Silmäasema Oyj - CEO [2]

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Thank you, Mikko, and good morning, everyone. This is Jussi Salminen speaking.

I will start by going through the highlights from the period. Looking at the big picture, we had a strong first half of the year. We had a good development in net sales, profitability but also in cost control. During the first half of the year, we continued to focus on the cornerstones of chain business. We launched these priorities already last year including building the operating conditions, developing our network and profitable growth.

Reviewing the first half of the year, we are delighted to see that our profitability has continued to develop in the right direction. This was the third consecutive quarter in which Silmäasema's adjusted EBITDA has improved year-on-year.

Looking at net sales, it has increased now both in first and second quarters. Good development in Optical Retail boosted the increase in net sales. In April-June, group's net sales grew by 5.4% to EUR 34.5 million while like-for-like growth was 5.3%. In January-June, the corresponding growth figures were 4.9% and 3.6%.

Good sales performance and prudent cost control supported adjusted EBITDA development. The adoption of IFRS 16 has an impact on these figures, and CFO Sari will illustrate this more later in this presentation. Adjusted EBITDA in April-June grew to EUR 5.7 million, corresponding 16.6% of net sales. In quarter 2, 2018, these figures were EUR 3.3 million and 10% of net sales. In January-June, the adjusted EBITDA grew to EUR 11 million, being 16.5% of net sales. In 2018, these were EUR 5.3 million and 9.6% of net sales.

We also saw a strong improvement in our cash flow from operations. The main drivers behind this development were strong profits from the period, change in net working capital and the impact of IFRS 16 standard. Looking at these results, I'm satisfied with our performance in both quarter 2 and first half of the year.

Let's have a look on our store and clinic network. Our business is based on a network business model in which network performance plays a key role. Silmäasema has been driving a quite a strong phase of network growth in the past years, but as we had previously disclosed, we have shifted our focus to developing our network on a customer and business basis. During the first half of the year, we continued to develop our network, focusing on store location, opening hours and staffing. We develop our network including store closures and openings based on business performance. Naturally, we take into account the outlook for customer and business potential.

In January-June, we opened 1 store in Finland and closed a total of 9 stores. In Estonia, we closed 1 store. Alongside closures, we are also planning to establish new sites in locations where we see potential to utilize existing and forecasted customer demand as well as possible. With regard to the hospital network, we have decided to combine the operations of the Vantaa eye hospital with the Helsinki and Espoo eye hospitals, but this change is not yet reflected in this picture.

That was the big picture. And next, let's dive into our 2 business segments in more detail. To begin with, a summary of our business structure. Silmäasema business is divided into the synergistic eye clinics and optical trade businesses. Turnover and earnings largely come from optical trade, as shown in the picture. More than 80% of the turnover of the optical trade comes from sales of eyeglasses and the rest from sunglasses, contact lenses and services. In the eye clinic business, we are Finland's leading private eye care provider. About 2/3 of the turnover comes from cataract and refractive surgery from our nationwide network of eye clinics. Our eye healthcare operations in our optical stores provide a major customer source for our eye clinics.

Let's examine our Optical Retail and Eye Healthcare segment next. Our net sales grew in April-June by almost 10% to EUR 25.3 million. Like-for-like growth was 9.2%. We can be very satisfied with both quarter 2 and first half of the year's development. Successful campaigns increased customer visit volumes in stores, and our personnel's good performance in sales and customer service boosted the net sales increase.

Profitability has recently developed well, and this was achieved also in quarter 2. Adjusted EBITDA continued to grow in quarter 2 year-on-year and was EUR 4.6 million, corresponding 18.2% of net sales. Excluding the impact of IFRS 16, the adjusted EBITDA in quarter 2 would have been EUR 3 million compared to EUR 1.9 million in the comparison period. As a whole, adjusted EBITDA is now developing to the right direction. One should still note that there has been and will be normal fluctuation in customer demand, company structures and competitive environment, therefore, too straightforward conclusions should not be drawn based on the short-term changes.

When looking at sales volumes, one should be satisfied. Quarterly sales volumes have developed well. The sales volume of both eyeglasses and branded sunglasses increased significantly from the comparison period. During the quarter 2, we had several successful campaigns. The difference with last year campaigns was the renewed campaign content and scheduling. In addition, we have redesigned the marketing of optical marketing, sharpened our messages and updated our media strategy. The campaigns during the first half of the year were successful, and the increased sales volumes were reflected positively in the group-level absolute and relative gross margin. In April-June, we saw the best quarters in our history as a listed company both in eyeglasses and sunglasses volumes.

Next, let's see how the eye clinics performed. Looking at these figures, I cannot be fully satisfied with the development of the Eye Clinics segment. We have identified major areas for our underperformance in Eye Clinics, and I'm confident that our efforts to change the pace will bring results going forward. Regarding sales in quarter 2, net sales fell year-on-year by 5.2% to EUR 9.2 million. Like-for-like change was 4% down. Net sales were especially burdened by the lower sales of other services than refractive and cataract surgeries.

Profitability was underlined by the decline in segment volumes and sales. During the period, we have invested in increasing business volumes. Based on the nature of these measures, the effects are typically visible in the longer term. In quarter 2, adjusted EBITDA was EUR 1.1 million. That is 12.3% of net sales. The impact of IFRS 16 adoption was EUR 0.3 million in quarter 2. We have carefully analyzed the reasons behind the decrease in the volume of measures and continued to improve the volumes. These include boosting customer acquisition, increasing cross-selling and developing medical cooperation.

And here is a visual illustration of the development of our major operations, i.e., refractive and cataract surgeries, at the quarter level. Regarding refractive surgeries, the demand in April-June and January-June was lower than in the comparison period. A total of roughly 2,200 refractive surgeries were performed at Silmäasema eye clinics in quarter 2. The volume was 8.7% lower than in comparison period. However, it's good to note that the volume of these operations fluctuate greatly. The overall volume of cataract surgeries in quarter 2 increased slightly on the comparison period. A total of 2,289 cataract surgeries were performed, of which 26% were surgeries paid for by means of service vouchers. The aging population and demand for good eye vision will drive the demand in cataract surgeries also in the future, and we are ready for that.

To wrap all up, let's look at the development in a group level. All in all, group's profitability and net sales developed well. This is a development we can surely rejoice in and acknowledge to the entire staff of Silmäasema for this achievement. Next, I will hand over to CFO Sari who goes through the financial perspective. Sari?

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Sari Nordblad, Silmäasema Oyj - CFO [3]

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Thank you, Jussi. Good morning all. This is Sari Nordblad, the CFO of the company.

And now let's have a look at our earnings in April-June and January-June. Net sales were up by 5.4% with like-for-like at 5.3%. In January-June, net sales were up by 4.9%; in terms of like-for-like, 3.6% increase. As Jussi earlier told, optical trade contributed well to the net sales with an increase of 9.9% during the second quarter; and during the first half year, 9.7%. Eye clinic net sales went down by 5.2% during the second quarter and 6.2% during the first half year.

Adjusted EBITDA margin grew in April-June from 10% to 16.6% including IFRS 16 impact amounting EUR 1.9 million. Excluding that impact, adjusted EBITDA margin would have been 11.2% of the net sales. In January-June, adjusted EBITDA margin grew from 9.6% to 16.5%, and that included a EUR 3.7 million impact based on the IFRS 16 adoption. Excluding that impact, adjusted EBITDA margin would have been 10.9% of the net sales.

Financial costs grew in April-June period by EUR 170,000; and during the first half year, by 3,000 -- EUR 321,000. The impact of IFRS 16 adoption in April-June was EUR 171,000; and in January-June, EUR 346,000. All in all, the underlying financial costs excluding IFRS 16 impact were down year-on-year.

Profit before taxes grew strongly. In April-June, it was up to -- by EUR 1.6 million; and in January-June by EUR 3 million. The impact of IFRS 16 in April-June was EUR 78,000 down; and in January-June, EUR 160,000 down. Undiluted earnings per share improved to EUR 0.15 which has an IFRS 16 impact of EUR 0.01 negative.

Regarding the IFRS 16 standard mentioned earlier several times, Silmäasema adopted this new standard concerning leases in the beginning of this financial year. The 2 major implications are following. Lease assets are presented as right-of-use assets in the balance sheet, and the corresponding lease liability starting from the moment that the lease asset has been in the company's use. Rents paid are allocated as amortization of these lease liabilities and also the finance costs part. Right-of-use assets are depreciated during the validity of the lease contract as straight-line depreciation.

Here is a more detailed overview of the impact of IFRS 16 standard. The impact of the standard on adjusted EBITDA in the second quarter was EUR 1.9 million positive, corresponding a margin of almost 5.4 percentage points as a percentage of EBITDA. The effect on overarching results was EUR 73,000 positive. The effect on the profit for the period was EUR 80,000 negative; and regarding the earnings per share, EUR 0.01 negative.

In January-June, the impact of IFRS 16 on adjusted EBITDA was EUR 3.7 million positive, corresponding margin of 5.6 percentage points. The IFRS 16 effects on the balance sheet are also significant. Net debt and, following this, gearing increased. And also the ratio of net debt to adjusted EBITDA increased.

In the balance sheet, the IFRS 16 adoption has an impact on several items. Net debt increased and also the net debt relative to adjusted EBITDA and gearing. The impact on the equity ratio was down by less than 10 percentage points, and the return on equity was also slightly down.

When looking at the gross margin in April-June, it was boosted by the net sales and grew by EUR 1 million. The gross margin was 55.8 in percentage. No changes year-on-year. This increase in gross profit was based on the increase in optical trade volumes. The gross margin was lower than during the first quarter, and this was due in particular to the sales structure of eye clinics. There was a greater emphasis on cataract surgery. And in particular, the service voucher cataract operations increased when compared to the other key operations. Some price changes have also been made with a small impact in overall. In January-June, the gross margin increased by [EUR 1.5 million], but gross margin in percentage points was down based on -- mainly on the differing sales mix compared to the first half year last year.

During the second quarter, EBITDA increased from EUR 2.8 million to EUR 5.6 million including the rental expenses of EUR 1.9 million rentals classified under the IFRS 16 standard. In other respects, EBITDA was particularly boosted by increased volumes and a few decreased expense items such as personnel expenses.

As we communicated earlier, we have analyzing possibilities to improve our efficiency and profitability in line with our operating model and IT system reform. In addition to this, we have identified opportunities outside our personnel expenses to streamline our operations and optimize our cost structure. We estimate the potential profit impact to be approximately EUR 2 million and arise from different items in our income statement. The impact is potentially achieved gradually by the end of 2020. The implementation of these measures has progressed faster than planned during the first half of this year.

Then having a quick look to our investments. Investments were exceptionally low in the early part of this year. This is due in particular to the fact that there was a little investment in stores and clinics at the beginning of the year. The focus has been on improving operations and the network in the early part of the year. The acquisition investments in the reporting period are attributable to the earn-out prices concerning company acquisition made during the previous years. Operational and strategic CapEx will be more visible to us to the end of the year as a whole, and we expect investments in site network and IT system to grow.

Then the balance sheet and net working capital. The most significant changes in the balance sheet results from the adoption of IFRS 16. Other noncurrent assets and liabilities increased by EUR 27 million. In debts, approximately 76% of the increase in rental debt are long term. Other changes in the balance sheet comes from the strengthening the cash and capital growth. Working capital improved further and now stands at minus 6% of the net sales.

Our cash flow from operations improved, and the operating activities vary strongly from quarter-to-quarter when looking at the cash flow. Historically looking, the second quarter cash flow from operations has been negative. In this second quarter, operating cash flow was clearly better than last year due to particular good earnings and increased efficiency in the net working capital.

The adoption of IFRS 16 standard has increased the net debt by about EUR 16.5 million. Actually, it was increased during the standard adoption by EUR 27 million but, on the other hand, reduced the increasing cash and loan repayments during the first half year. IFRS 16 has also a significant impact on the balance sheet ratio, but comparable figures improved. Net debt to adjusted EBITDA decreased to 1.9 without the impact of IFRS 16 standard.

The value of the covenant calculated in accordance with the financing agreements was 1.8 when the limit value is 3.5. In the loan agreements, the key figure is calculated without the IFRS 16 impact.

At the end of June, Silmäasema had EUR 100 million of undrawn financing under the current financing agreements. During the first half year, we got the bank loan by EUR 10 million. In April, we signed an agreement to establish a domestic EUR 100 million commercial paper program. During the period, we issued commercial papers totaling EUR 7 million under this program.

Now Jussi, you will continue about our priorities during this year.

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Jussi Salminen, Silmäasema Oyj - CEO [4]

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Yes. Thank you. And let's then look for our top 3 priorities for year 2019. First, improving operations. Here we have, for example, our development program for operations and IT which we have announced earlier. In January-June, we commenced the first phase of supplier selection.

The development of the store and eye clinic network is a second priority. And here we have, for example, optimizing the network by closing and opening of store locations, looking for opening hours and store offerings to meet better customer demand. In January-June, we opened 1 new store and closed 9 stores in Finland. And in Estonia, we closed 1 store. We'll continue to systematically make adjustments to our network. In second half of the year, our network development will include also store openings based on our market analysis.

And the third priority, profitable growth. As mentioned earlier, we have identified opportunities outside our personnel expenses to streamline our operations and optimize our cost structure with a potential impact on profit to be approximately EUR 2 million towards year 2020. The implementation of these measures has progressed faster than planned during the first half of the year.

I would like to also mention that online and web store investments made during the first half of the year are beginning to show up, and e-commerce sales have developed well. Regarding our guidance 2019, we repeat our outlook for 2019 without changes.

Next, let's see our revised strategy for period 2020 and '22. The Board of Directors has approved the updated strategy for period 2020 and '22. We will present this strategy in more detail as the autumn progresses including our Capital Markets Day and other investor meetings. During the work, we have assessed our current strengths, the eyesight market trends, but also the megatrends affecting good vision. At the heart of the strategy is the customers' most significant expectations and needs when choosing partner for his or her good vision. We are already responding to these needs, but we'll be even better in the future. We seek to develop into customers' preferred choice that comprehensively responds to their changing eyesight needs and offers the most suitable solutions for good eyesight for different ages in various environments and situations and for all eye healthcare issues.

Our goal as a leading player in the Finland is to renew and grow the sight market. We will actively seek new solutions where we can strongly and responsibly use technologies and customer data. In addition, we are responding to our customers' changing needs by developing new channels and concepts and striving to provide increasingly unique customer paths. Silmäasema is in a better position than other players in the industry to become the most preferred partner for the customer. This is underpinned by Silmäasema's long-standing strengths: a highly qualified staff, a unique and comprehensive service offering and a comprehensive store and hospital network.

And to summarize, we have crystallized our strategy in 3 main objectives. The company's growth and profitability will be based on becoming customers' preferred choice and the leading expert in eye healthcare, renewing and growing the eyesight market and improving performance and profitability.

The Board of Directors has also confirmed financial targets for the strategy period which runs until the end of 2022. They are provided for growth, profitability, earnings per share and dividend. As for growth, the target is that our net sales is outpacing the market; for profitability, EBITDA to be more than 20% of net sales; as for earnings per share, growth in earnings per share; and for dividend, annually increasing dividend.

We will organize a Capital Markets Day in Helsinki, and it will be the first one for Silmäasema, and it's for institutional investors, analysts and financial media, and it will be held on 18th of September 2019. The theme of the day is the updated strategy for Silmäasema towards 2022. The presentations and materials will be in Finnish. English material will be available in company website.

So that's all from the half year financial report but also the updated strategy for 2020 and '22.

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Sari Nordblad, Silmäasema Oyj - CFO [5]

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Thank you, Jussi. Now we have time for your questions, and I will hand over to the operator. Please state your name and organization before asking your questions. So please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Sami Sarkamies from Nordea Markets.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [2]

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Congratulations on the solid results for Q2. I have a couple of questions starting from Optical Retail. You have achieved a good improvement in top line and margin expansion during the first half of the year. Can you be a bit more specific on what you have done differently in comparison with the past?

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Jussi Salminen, Silmäasema Oyj - CEO [3]

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Thank you, Sami, for the question. Regarding the optical retail market, as we know, it's all about attracting customers to our channels, which means that we have to be very precise with our messages to target groups in order to attract and -- so that they will visit our stores. And when visiting in our stores, of course, that our offering meets the targets or the needs of the customers but also how our personnel can handle the customer needs and provide suitable solutions. So I think in overall, it's a combination of our campaigns together with a renewed marketing messages and media solutions and how our personnel have been able to treat the customers on the floor.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [4]

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Okay. And then moving to Eye Clinics, you did flag growth investments there which had a negative impact on margins in Q2 but should have positive impact on sales in the coming quarters. Can you elaborate these measures and quantify their magnitude in Q2? And then are you planning on making similar investments also in the coming quarters?

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Sari Nordblad, Silmäasema Oyj - CFO [5]

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It's a question about strategic marketing investments, and we will continue those measurements in the future, too. Regarding the level and the amount of investments, we are not declaring those at the segment level.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [6]

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Okay. And then a general question regarding competitive landscape in private eye surgery. Can you describe the level of competition? Is the market soft? Or is it you're losing market share to rivals? And how is the pricing environment at the moment?

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Jussi Salminen, Silmäasema Oyj - CEO [7]

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Regarding the eye clinics, the situation is so that -- as we have seen, there's a lot of fluctuation between quarters, and that's because of the demand for these kind of services. The landscape hasn't changed that much. And as I have stated earlier, I still feel that we have a lot to do in our own operations instead of I would go behind that the market is soft. So I'm positive that if and when we are accomplishing our actions already started, we can see a positive trend going forward.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [8]

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Yes. And I think you mentioned that you will be closing down the eye hospital in Vantaa. Are you planning also other similar activities? And will this have a major impact on profitability?

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Jussi Salminen, Silmäasema Oyj - CEO [9]

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It's a natural part both for Optical Retail but also the Eye Clinics that we constantly review how we are meeting the customer demands and we are really making a good business. That's -- it's part of our, of course, toolbox that we make this kind of analysis, but at this point, we don't have any news regarding new hospitals outside Vantaa.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [10]

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Okay. And then I think you mentioned when you were talking about gross margins that these were lower due to sales structure at eye clinics. I think you were referring to kind of like negative sales mix, thinking of the amount of refractive surgeries and then higher share of service vouchers on the cataract side. You did also mention price changes. Were these done at Eye Clinics or also at Optical Retail?

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Jussi Salminen, Silmäasema Oyj - CEO [11]

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First of all, the sales mix, for sure, has an effect on the gross margin in Eye Clinics like the campaigns has for Optical Retail. But regarding pricing, I think there must have been some misunderstanding because I didn't comment anything for that. But for sure, on a quarter level, the service mix in Eye Clinics has an effect on gross margin.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [12]

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I think it was your CFO who mentioned price changes regarding gross margin development.

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Sari Nordblad, Silmäasema Oyj - CFO [13]

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Yes, that's correct. We have not intentionally increased our prices throughout the whole offering, but some changes have been made in certain products and services, not significant changes, but some slight movements there.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [14]

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So have you raised prices or lowered them?

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Sari Nordblad, Silmäasema Oyj - CFO [15]

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There have been a changes upwards and downwards. It's a mix.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [16]

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And are we now talking about Eye Clinics or also Optical Retail?

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Sari Nordblad, Silmäasema Oyj - CFO [17]

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Talking about Eye Clinics.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [18]

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Okay. And then moving to your updated strategy and financial targets, can you just quickly explain what are the main differences between the old strategy and the new one, please?

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Jussi Salminen, Silmäasema Oyj - CEO [19]

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Well, I would say that the new strategy's kind of a continuation for the old one. If the old one is -- was all about ensuring that we have the best experts in the company but also growing the network in Finland together with growing the portfolio so that we have both strengths from the optical and the eye clinics side. I would say that the next phase is that we are, of course, taking all the efficiency out of this network, all the efficiency when it comes to sales, but also squeezing kind of the fixed cost as much as possible. So natural part to take the efficiency out from the network.

But even bigger that instead of just concentrating on different offerings and products and services, we are moving to much more customer-centric model where we can utilize customer data in order to approach those customers with the different media solutions, make different kind of offerings. That's one example. And the second, of course, is that we are eager to find out new concepts and channels to reach our customers in order to grow the market. So to summarize, it's kind of a mix that for the existing market, making the customer in focus and making all those necessary actions to attract existing customers but also trying to grow the market as much as possible.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [20]

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Okay. And then you're effectively reiterating previous margin targets, aiming for above 20% adjusted EBITDA margin. Do you think this will be doable at both the segments? And maybe can you open up the main drivers for required margin improvement at both segments separately, please?

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Jussi Salminen, Silmäasema Oyj - CEO [21]

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We haven't stated any segment targets, so it's on a group level. And overall, we are shifting now to the period where instead of talking these 2 segments, the focus is much more on customer and how can we ensure that, for example, the gross sales is happening as much as possible. Regarding the tools, it's a combination of efficiency, things in our operations, how can we ensure that our cost level and fixed cost is in a good direction. And thanks to this customer-centric strategy, we are able to attract more customers and therefore increase our revenues.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [22]

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Okay. And then my final question is regarding leverage target. You don't seem to have one anymore. Previously, you were targeting to be below 2.5. Is this still valid? Or is it so that you just don't have a target anymore?

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Sari Nordblad, Silmäasema Oyj - CFO [23]

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We evaluated the target compared to the previous strategy. And when looking now, our financial position and the level we have reached more or less as a new standard in our leverage, we don't see that 2.5 is relevant anymore.

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Operator [24]

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(Operator Instructions) And there are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.

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Sari Nordblad, Silmäasema Oyj - CFO [25]

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Thank you for your questions. That was more or less for the day. We wish you all a great late-summer weekend ahead. We will have our next financial report call in mid-November, and there we will be presenting our Q3 results. Thank you all.

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Jussi Salminen, Silmäasema Oyj - CEO [26]

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Thank you.

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Operator [27]

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This now concludes the conference.