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Edited Transcript of TCM.CO earnings conference call or presentation 26-Feb-20 9:00am GMT

Q4 2019 Tcm Group A/S Earnings Call

HOLSTEBRO Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Tcm Group A/S earnings conference call or presentation Wednesday, February 26, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mogens Elbrond Pedersen

TCM Group A/S - CFO

* Ole Lund Andersen;Chief Executive Officer

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Conference Call Participants

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* André Thormann

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Lars Topholm

Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst

* Sindre Sørbye

Arctic Fund Management As - Portfolio Manager & Partner

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Presentation

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Ole Lund Andersen;Chief Executive Officer, [1]

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Good morning, ladies and gentlemen. We are looking forward to making a presentation of our Q4 report, which also today includes the full year of 2019. With me here today is our CFO, Mogens Elbrønd Pedersen. And I will be coming on the business and financial results. And after which, we will hand over to the operator for the Q&A session.

So please turn to Page #2. The revenue grew by 3.9% in Q4. However, the organic growth was 6%. The fourth quarter took the full year revenue above the DKK 1 billion milestone for the first time in the company's history. And this also means that TCM Group have approximately doubled its turnover during the last 4 years through organic growth and through a very successful acquisition of Nettoline.

Business to business continue to have the highest growth rates, and we can see that our strategy of expanding across the business-to-business categories are very successful.

Revenue for the quarter was DKK 262 million compared to DKK 252 million in Q4 last year. Q4 last year was a strong comparison because it was up 17% compared to Q4 in 2017. Adjusted EBITA was DKK 45 million, which are more or less on par with last year, which was DKK 46 million. Adjusted EBITA margin was 17.3% compared to 18.3% last year.

And finally, the net working capital ratio was improved again, it was a minus 10.8%, which also is an all-time high record for TCM Group. And this compared to last year of minus 10.5%. The cash conversion continued to be strong at a level around 100%.

Please turn to Page #3. The organic growth was 6%, and Mogens will -- afterwards can elaborate during this on the following slides. For the full year, the revenue in Denmark grew organically with 13.4%, in a Danish market that we estimate grew between 1% to 2%. And thereby, we continue to outperform the market. During Q4, we also opened a new store in Tvis in Holbæk. And thereby, we increased the number of branded stores to 68 compared to 65 stores last year.

During Q1, in 2020, we also -- we've added a new store in Ålesund in Norway. And we can also inform you that we have a strong pipeline of new stores in Norway, which we would expect to be able to communicate to you in the upcoming future.

Q4 was relatively -- negatively impacted by a nonrecurring cost of DKK 4 million related to the lightning strike that we have in August -- had in August, primarily cost was related to production and a higher level of quality cost. For your information, the production was back on normal during Q4, and we do not foresee any further cost related to this incident. And finally, revenue and earnings was within the guidance ranges.

Please turn to Page #4. TCM Group has grown consistently over the past many years, as I said, and the company is in a very strong position for future growth. But this, of course, have some requirements regarding investment in our production.

During Christmas holiday, we invested in our lacquer department. And as you have heard previously, we have invested -- we had an investment opportunity in our lacquer department where we will optimize our production setup. The investment in Q4 is the first step of 4 step in a total investment around DKK 20 million, and this will have a relatively short payback time of 3 years.

This investment will increase the capacity in our lacquer department, improve the quality further, and at the same time, it will have a positive environment impact since the investment will enable us to reduce the total carbon emission from the company with approximately 5%. Step number two in this project will be implemented during Q2 in 2020.

Looking toward to future growth and thereby the future requirements of our supply chain, we have taken the first step regarding -- [to a possibility to build] new and highly automated factory by signing an option to buy additional land in connection to our 2 factories here in Tvis. The option covers an opportunity of buying [170,000] square meters of land, yes.

We're looking -- we are working together with the authorities regarding the signing] and in Danish that would -- we call it (foreign language). And we are in the process of working with a scope to possible -- with the possibilities of the new factory, including the size of the factory and the level of automization, and that will be something we'll do in the future.

I will now be handing over to Mogens to go through the financial for Q4.

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Mogens Elbrond Pedersen, TCM Group A/S - CFO [2]

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Thank you, Ole. And please turn to Page 5.

As Ole mentioned, revenue in Q4 grew by 3.9%, but Q4 last year included the ownership of the Svane store in Aabenraa. This store was divested as of 1st of February 2019. And in Q4, the store had, last year, an impact on revenue of approximately 2 percentage points. And adjusted for this, the organic growth was around 6%.

EBITA was DKK 45 million, more or less on par with Q4 last year. Adjusted margin -- EBITA margin was down from 18.3% in Q4 last year to 17.3%. EBIT was, as Ole mentioned, impacted by nonrecurring costs in Q4 of DKK 4 million and adjusted for this, EBIT was down 2% compared to Q4 last year.

Please turn to Page 6. For the full year, the revenue grew by 11.9%, which is entirely an organic growth. Adjusted EBITA was up DKK 13 million, which corresponds to an increase of 9.1%. Adjusted EBIT increased roughly in the same level, up 9.6% from DKK 140 million in 2018 to DKK 154 million in 2019.

Please turn to Page 7. The revenue growth in the quarter was driven by the branded stores in Denmark and primarily within B2B and also through a higher share of revenue from third-party products, which is white goods and tabletops. Revenue in Denmark grew by 4.1%, with an underlying growth of 6%.

Revenue outside of Denmark was up 2%. The revenue through branded stores in Norway increased by 3% in Q4, and sales through nonbranded DIY stores increased by 1%, leading to the total of 2% growth.

The full year revenue in Denmark grew by 13.4%, in the Danish market that we estimate grew by 1% to 2%. Full year revenue outside of Denmark was down by 1.8%. Sales through branded stores grew by 3.8%, but was offset by lower sales through the nonbranded DIY stores.

Please turn to Page 8. Gross margin in Q4 was 28.9%, and this compares to 30.9% in Q4 last year. The decline in gross margin reflects a higher growth within the B2B market, which has a structurally lower gross margin, and combined with a higher share of revenue for third-party products, which also has a structurally lower gross margin. And as you may recall, this is in line with the sales mix and the gross margin development in the previous quarters.

The operating expense ratio decreased by 1 percentage point compared to Q4 last year to 12.4%. And the decrease is a result of increased leverage from growing the business, combined with a relatively stable cost base. Q4 was, as mentioned, negatively impacted by nonrecurring cost of DKK 4 million, which relates to the production setback following the lightning strike in August and related service and quality cost.

Adjusted EBIT was DKK 43.4 million compared to DKK 44.3 million in Q4 last year. And the full year adjusted EBIT was DKK 154 million, up DKK 14 million from DKK 140 million last year.

Please turn to Page 9. Net working capital improved by DKK 15 million to minus DKK 109 million, and the working capital ratio improved from minus 10.5% last year to minus 10.8% end of Q4, and this is an all-time record for TCM Group.

The improvement was primarily driven by lower trade receivables compared to last year, and this was due to a lower number of outstanding debtor days at the end of Q4 compared to Q4 last year. And this is actually the fifth consecutive year where we achieved a net working capital ratio around the minus 10%, proving that this level is a sustainable level.

Net debt fell by DKK 67 million in Q4 to DKK 52 million compared to DKK 91 million at the end of Q4 last year. And this decrease in net debt is despite the significant impact from the IFRS 16 implementation, which increased net debt by DKK 40 million.

We have a strong balance sheet, a leverage of 0.3 compared to 0.6 at the end of Q4 last year.

Please turn to the next page. Free cash flow was DKK 45 million in Q4 compared to DKK 54 million in Q4 last year. The free cash flow was negatively impacted by lower operating profit, which was primarily due to nonrecurring costs. The change in net working capital in Q4 was slightly less positive compared to Q4 last year despite the improved net working capital ratio at the end of Q4.

Furthermore, higher CapEx and higher tax payments also had a negative cash flow impact in the quarter. CapEx ratio was 1.5% compared to 1% last year, and in line with our communicated expected CapEx ratio of 1% to 2% of net revenue. Cash conversion remains strong, still around 100%.

And for the full year, the free cash flow was DKK 132 million compared to DKK 142 million in 2018. And 2018 include the one-off effect of the sale of the factory in Horsens, which had a positive cash flow impact of DKK 17 million.

Please turn to Page 11 and the financial outlook for 2020. We expect a revenue in the range, DKK 1.040 billion to DKK 1.080 billion, corresponding to a growth of 3% to 7%. The Danish market is characterized by a higher level of macroeconomic uncertainty, and the guidance is based on a flat to marginally growing market. EBIT adjusted for nonrecurring items is expected in the range DKK 158 million to DKK 170 million, which corresponds to a growth of 3% to 11% compared to 2019.

Please turn to Page 12. The Board of Directors proposes an ordinary dividend payout of DKK 5.25 per share, corresponding to 47% of net profit, which is in the medium-range of our dividend policy and higher than last year's dividend payout. The dividend distribution will be up for approval at the AGM on 31st of March.

Ole, this concludes the financial review, and I will hand over to you.

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Ole Lund Andersen;Chief Executive Officer, [3]

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Yes. Thank you much, Mogens. Yes, as we said, this concludes the financial presentation. But as you all have seen, we have communicated earlier today that I would now step down as CEO for TCM Group, and I will, in the future, be focusing on Board assignments.

So I will take this opportunity this morning to thank you all for a very good cooperation that we have had during the last couple of years. Furthermore, I am extremely pleased that our Board already have found a strong successor in Torben Paulin, and Torben will be taking over as new CEO from the 1st of March 2020.

I'm a strong believer that TCM Group is a company which has delivered strong top line growth and bottom line growth for many years, and at the same time, we have a strong cash conversion. And therefore, there is a strong potential for future growth. And I am pleased to hand over this responsibility to Torben Paulin from next month.

So once again, all, thank you very much for listening in this morning, and we will now be handing over to the operator and open up for the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question for today is from Lars Topholm from Carnegie.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [2]

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Yes. Last year -- Ole, first to you, thanks for the past couple of years. You'll be greatly missed. You've done an amazing job. But best of luck with your activity going forward.

A couple of questions to begin with from my side. On the growth expected for 2020, can you comment a bit on how you see your growth distributed between B2B and B2C? And maybe also talk a bit about how you see growth in Norway where I assume you should get some benefits from having a more dedicated Norwegian organization and then having new stores.

A second question goes to the highly automated factory you mentioned in the presentation. Can you maybe comment a bit more on the magnitude of CapEx related to that? What's the time frame? And if it is highly automated, what will this mean for margins? That's my questions for now.

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Ole Lund Andersen;Chief Executive Officer, [3]

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Thank you much, Lars, and thank you for the kind words. I will also be missing you. Regarding the turnover, I think, Mogens, will you try to answer that and also on the Norway question?

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Mogens Elbrond Pedersen, TCM Group A/S - CFO [4]

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Yes. So looking at the mix, B2B and B2C, we foresee a relatively comparable mix in 2020 compared to 2019. And you're right that we have -- we will have some benefit from the new stores in -- coming up in Norway. So if you look at the branded business, growth potential is higher in Norway. And also seen in the light that our expectation for the Danish market is a relatively flat market.

Regarding CapEx, first of all, it's -- we have signed an option, meaning that there's no, you can say, binding obligations from our side. If we were to progress with this, the investment in land is approximately DKK 5 million. It's a bit too early to discuss investment in the factory. We haven't scoped the factory layout at this point of time, and therefore, we will not comment on the size of the future investment on that. We will do that in due course.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [5]

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Can you maybe comment a bit on what you can automate that isn't already automated?

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Ole Lund Andersen;Chief Executive Officer, [6]

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Yes. Maybe I could try to explain that. There's actually quite a lot of things that can be automized within the production. But the main thing is actually to where you actually are putting the carcasses together. This is done today more or less 100% manual, and there is actually opportunity there for automizing that process today. This technology is already there. So that's something that we are considering, of course. But please remember that we have a free -- that we have an unutilized capacity still around DKK 200 million, DKK 250 million. So we are in good time. There is no rush in this. So this is something that we are -- we'll be working with future-wise, of course, to scope this as Mogens mentioned.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [7]

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Okay. Can I ask a couple of more questions since I'm here now? So have you had any further indications from HusCompagniet/Eurodan and how that might affect your relationship to these 2?

And compared to what we've seen in the past year, have you won any new significant B2B contracts? Or have you lost any of those you've won in previous years?

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Ole Lund Andersen;Chief Executive Officer, [8]

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Regarding the business, there is no changes in that. As Mogens was saying, we are looking as business as usual. We have had no further contact as we are informed the deal between HusCompagniet and Eurodan is not approved yet. So we, of course, are awaiting that situation when that occurs. So it's business as usual regarding business-to-business, I would say.

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Operator [9]

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(Operator Instructions) The next is from André Thormann from ABG.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [10]

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But just to start off with this one. What was the development of Norway during Q4? Did you see any new things?

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Mogens Elbrond Pedersen, TCM Group A/S - CFO [11]

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Yes. So in Q4, Norway was up 2%, and this is split in a slightly higher growth within our branded business, so the Svane and Tvis stores of 3% and a bit lower growth in the nonbranded of 1%. If you might recall, previous quarters, we have had growth in our branded business and also have 4% growth for the full year, but we have had seen a decline in nonbranded business, which seem to have been stopped now.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [12]

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Okay. Okay. And then in terms of next year, what is your visibility? And do you see anything in terms of the construction prospects? Anything for next year, is the visibility better than last year? Or can you say anything about that?

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Ole Lund Andersen;Chief Executive Officer, [13]

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No. We expect the market to be slightly flat or perhaps growing with up to 1%. So it's a Danish market that we're looking into which is a little bit weaker than last year. But having said that, we still -- is in a strong position as we also commented on earlier that the business is normal as we're seeing it, the business to business. We have been growing on all 4 different categories, and we also have been growing on the private consumer business as well. So we are seeing this as a normal situation. And the visibility is still the same as we have been looking in -- compared to the last couple of years as well.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [14]

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Okay. And then just to follow-up. In terms of the market development, I mean, what is it you see that makes it more flat than last year? Yes.

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Ole Lund Andersen;Chief Executive Officer, [15]

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That some of the big projects that you have been seeing in a couple of past years, and especially in Copenhagen and Aarhus that you are not seeing future-wise -- that may be coming back again. But there was sort of a slowdown in those big cities. You also see them in Aalborg and other cities in Denmark. So that's primarily the reason why we're seeing the market going a little bit down, as we see it anyway.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [16]

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And what about Norway? The market growth in Norway, is that very different or...

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Ole Lund Andersen;Chief Executive Officer, [17]

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The market [intelligence] we have is that we are looking at a relatively flat market there as well. But please remember that we are now, as I said, we're opening one new store also and we also have communicated lately that we have hired a Norwegian country manager with experience within the furniture -- sorry, within the kitchen industry to be heading that forward. And as we sit here in this presentation, we expect shortly also to be able to announce further stores that we'll be opening in Norway. But that's still in the market which are relatively flat. So we will gain market shares in the Norwegian market as we see it.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [18]

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Okay. And then just my last question. I know you will be more specific in terms of store openings, but can you give any number in terms of how many stores you expect to open? Maybe on a split between Denmark and Norway or just on a total level for 2020.

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Mogens Elbrond Pedersen, TCM Group A/S - CFO [19]

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Yes. For 2020, we haven't communicated that, but we have a medium-term target where we have listed, which you can find also in our Annual Report. So in Denmark, we see a potential of 5 to 8 stores, primarily in Tvis and Nettoline. And in Norway, we see a potential of more or less doubling the number of current Svane stores from 8, now going to 9 in Q1, to somewhere between 15 and 18 stores. So this is our target. And of course, we will communicate as soon as we can when we have the stores opening. But this is a, you can say, 2- to 3-year plan.

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Operator [20]

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We have a follow-up question from Lars Topholm.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [21]

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Actually, 2 questions, just on the guidance where your flat growth is going to be back-end loaded. Should we assume that top line could actually contract in Q1 or Q2? Or do you just see it flattish?

And then a second question, which I know you can't answer very specifically, but can you comment on acquisitions? And is there any activity, or is it completely dead? How do you see that? And could something happen in 2020?

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Mogens Elbrond Pedersen, TCM Group A/S - CFO [22]

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So Lars, the first question regarding the guidance, you should expect a flattish development in Q1. And again, we delivered 17% growth in Q1 last year. So it was a very strong quarter. And then, of course, the guided growth we'll expect to come in later on. And Ole, on M&A?

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Ole Lund Andersen;Chief Executive Officer, [23]

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Yes. M&A, we'll continue as we have been doing. We have talked about it number of times that we are drinking a lot of coffee, and you never know when things are going to happen. We know exactly the way we want to develop ourselves and where we're looking at and we're talking to, but we cannot communicate anything further on that, Lars.

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Operator [24]

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And our next question is from Sindre Sørbye from Arctic Fund Management.

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Sindre Sørbye, Arctic Fund Management As - Portfolio Manager & Partner [25]

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Yes. And first, Ole, thank you for having done a terrific job with the TCM. So I wish you luck in your next endeavors. Just want to ask about your payout and the balance sheet. I mean by most measures, one could say that TCM is [heavily] over-capitalized. Have you contemplated initiating a buyback program or paying out an extraordinary dividend?

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Mogens Elbrond Pedersen, TCM Group A/S - CFO [26]

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Yes. Thank you, Sindre. Of course, it's something that the board assesses currently and also taking into future investments into account and possible M&A. And this is, you can say, the background for the dividend policy. So that is the decision right now, to focus on dividend distribution, also given the liquidity in the share when talking about share buyback programs. That's the current decision from the Board.

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Operator [27]

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And there are no further questions waiting. I'll hand the call back to yourself, sir. Sir, there are no further questions. Do you have any closing comments?

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Ole Lund Andersen;Chief Executive Officer, [28]

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Yes. I would like to thank you all for listening in this morning. And thank you very much for a very good cooperation. And I, together with you and all the shareholders, wish the best for the company, of course.

So thank you much for listening in, and have a nice day. Thank you very much.

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Operator [29]

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Ladies and gentlemen, that does conclude the call for today. Thank you all for joining. You may now disconnect.