Boreo Oyj (BOREO) Earnings Call Transcript & Summary

Good and sunny morning from the Boreo headquarter. And welcome to this session where myself, Kari Nerg, and our CFO, Aku Rumpunen will discuss the developments of Boreo during the second half of '23. Agenda. As before in our webcast, so I will recap both strategic and financial highlights of the second quarter and then Aku will discuss the business performance, group and business area, company specific, more in detail and then we will take at the end of the session questions that you may you may have asked during the during the webcast, so, please use the chat function made available for you. So, starting off a Q2 -- so Q2 was for us a decent quarter, [ location ] of a quarter I would describe. Financial performance wise profitability was on a moderate level. EUR 2.4 million of operational EBIT, at the level of last year, 5.6%. Profitability margin is a, I would call it, a decent to moderate performance from our current portfolio. At the same time the cash generation, I'm very pleased with that to see that the earnings and the return on capital mindset is rooting in the firm better and better quarter-by-quarter. And in the quarter now strong, roughly EUR 4 million operating cash flow, 165% for this period. So if we look at the performance during the first half of the year. We had a strong Q1 when it comes to earnings growth, roughly 90% growth compared to last year. Cash generation, on the other hand, was not as strong. So if we look at H1, overall, we've grown results on a good level, roughly close to 30%. And also the operative cash conversion of roughly about 100% has been on a stable level. So, overall, H1 has been a good start for the year. During the quarter, we also continue to execute our M&A program and acquired or announced to acquire a company called Delfin Technologies in June '23, closed on Q3. On the side of Q3, so are not visible yet in our numbers, but are pretty welcome yet another credit entrepreneurial business to the Boreo Group. And if we look at the trending performance, financial wise a bit more in detail. Profitability wise, we continued trending in the right direction, rolling 12 month basis, 26% earnings growth in the period ending, June '23. This is a good result, and then demonstrates also the performance during, during Q1. I was, of course, looking at it from -- with the longer term lens, starting from EUR 3.9 million '21, being now at closer to EUR 10 million overall, tells that we've gone to the right direction as the firm. And look forward to seeing and expect to see gradually improving performance in the coming quarter as well. Returns on capital are on a modest level at the moment. Our target is 10% minimum return on capital employed. We are not there yet. We're working hard to steer the firm towards, that direction. Now return on capital employed remained quite stable, compared to the previous quarter, negatively impacting slightly by the operational profitability, on the other and supported through the strong cash generation we saw in the quarter. Leverage, in line with the trend you've seen in the last, 1 to 2 years. So we continue the steer to ship carefully, maintaining a solid financial position. Leverage at 2.4x. Net debt to operational EBITDA also at the levels where we -- towards the future like to be, rather downwards and then up. Then if we look at a bit more specifically, a couple of key highlights from my side on the business area performance and company specific performance. So, during Q1, we introduced for the first time the metric that we use in the steering of all our -- the whole of the -- the whole group and all the companies as part of the family. So the return on trade working capital. We are currently now at 29% on a rolling 12 month basis. And as a reminder, roughly with this sort of the portfolio, we should be around 40% in order for us to be at the expected levels of 15% return on capital employed at group level. Electronics and technical trade business areas has been trending rather positively in the last quarter with regards to capital efficiency, whereas we've had our difficulties with the heavy machines business area. Now during Q1 and the first half of the year, in electronics business area, the figures, although they look quite okay on a business area level, we're negatively impacted by especially the challenges we've had at Signal Solutions Nordic related to the investment holidays or, let's say, pushing forward investments on the side of our main customers. On the other hand, for example, our Baltics businesses have been operating extremely well and developing due to right direction over the last 3 years, but especially now during the last year. And in particular, the profitability and performance development has been has been great in our Latvia business. On the technical trade side of things, all the businesses is part of the portfolio, so machinery, produce, Muottikolmio, J-Matic and Filterit, delivered a good profitability during the quarter. On the other hand, at machinery we have had our, let's say, temporary challenges with regards to working capital. Too much working cap tied into the business and we're working hard to change that situation in the second half of the year. Within the heavy machines business area then, a great achievement how we were able to complete the exit. We completed from SANY operations in Finland and Sweden. Also happy to see the Putzmeister business which has been under cost and -- on a cost pressure in the last -- cost pressure and also delivery challenges during the last 2 years delivered stable 5% operating result. Then on the other hand at FNB, the other business we've had our difficulties within the first half. We've been undergone investments into improving our production processes, the production flow, the manufacturing of timber trucks and other equipment in the firm, as well as implemented a new ERP during Q2. So these had a negative impact on the business area results, also the growth results, consequently. So negative operating ability during the quarter, which we expect to ease in the coming quarter. And then M&As and acquisitions are an integral part of our business model. As a reminder, we've deployed since Q3, 2020, roughly EUR 43 million acquisitions, now not including the Delfin acquisition. That was completed now on -- in early July. However, 16 acquisitions, good companies, which all contribute to the gradual improvement of the resiliency of the firm, also the financial profile of the company. And this company we've been able to acquire roughly at 5x EBITDA on a consolidated basis, now looking at it backwards. And as mentioned in the very beginning, one of the highlights of the quarter was the acquisition of Delfin Technologies, a company based in Kuopio, in Finland. A health technology business that produces hand-held skin and edema measurement instruments. So, new type of a business for us, which we found and we're happy to welcome to the group as a result of our own proprietary sourcing work that we started in '22. An interesting company that serves customers both on the on the medical side of things but also in the luxury industry with -- as you can see from the numbers, really strong and also longstanding strong profitability, high margins, also high returns on capital. And on the back of the positioning and also the validation that the company has in place on the -- for clinical use both in the U.S. and in the EU. Very happy and eager to continue, and starting to work with the team to create an interesting growth path towards the future. So the next 6 months or the second half of the year will be the time to do some strategic decisions as to the, let's say, the strategic direction of the firm and at the same time maintaining a steady financial performance as we've seen in the last years. Then finally from my side a sort of a brief outlook towards the future. Not guidance as we -- in line with the way we do things. But, nevertheless, talking a bit more on what -- where our focus in the firm internally is and how we think about the world given that the -- let's say, business environment is somewhat of a tougher one compared to the last year's. Number one, we remain confident that the -- that our earnings targets, 15% earnings growth per annum, in the minimum is a target that we can achieve in the coming years. We have seen during Q2, as seen from many companies and industries not only in Finland, but globally, during Q2 some signs of weakening and more challenging environment. But, however, our orderbooks in the companies continue to be rather healthy. And given the work that we have done, both organically with the companies that we will already owned for a longer period of time, but also through acquisitions. We are quite happy with the portfolio companies we have and are confident in their ability to continue defending margins and making money in these type of environments as well. This will be the demonstrated, and can also seen in the numbers profitability wise, gross margin wise that how our business have developed in the last quarters. Secondly, capital efficiency is a core area where we work with the organization, not only -- I mean, we're not there near to optimize our working cap levels on an unsustainable basis in the short term. However, we work with our MDs and our key people and the whole organization to root the mindset of -- the importance of, let's say, prioritizing, and balancing between making a good operating result. But also, taking into account the cost through the balance sheet, that is attached to making that result. So as of Q2 2023, the operational working capital is tied to our business around about EUR 31 million, so excluding Delfin figures, which are rather low. And I believe that we are, I mean, the normal, sustainable level where our companies can operate in, in the longer run is closer to the mark of EUR 25 million. And, we are working to get towards this target in the in the coming quarters. Naturally, then new companies joining the firm, the absolute figures will continue to, hopefully, arise, but nevertheless relatively speaking, we should be able to achieve and release some capital out to working cap in the short term as well. Financial position, we want to maintain, steady in these environments. We have during Q2 also increased buffers -- financial buffers into firm by negotiating an EUR 8 million increase to our existing credit facilities which support -- are there to support the companies and the operative performance, should there be a need to do that. That's a good thing. And, secondly also, we remain continuously disciplined to safeguard the position at -- safeguard the financial standing of the firm at any given time. Then last but not least. So, a bit of a longer term outlook. We did during Q2 communicate through our social media channels that we were glad to finalize in June, a Version 1.0 of a -- of our operating manual called Boreo Book. This book is, I believe, quite a very important milestone in the development for -- in the development of the firm as, let's say, after 3 years of figuring out the concept, learning, making mistakes, making improvements. I believe we have arrived with this book and its content to simple set of guidelines, which we serve as the guidance for, building the firm for a long period of time. So we're happy, happy to have been able to work with that with a larger amount of our key employees. And I'm finishing off that first set of the document. We do feel that we want to communicate more and more on the long term value creation drivers on how we built the firm, how we how we work with the firm to make it a successful one in the long run. And then for this purpose, we have a plan to introduce a concept where we call Boreo Series, during, Q3, in which we will aim to -- through series of letters in the coming quarters and years to open up and facilitate the discussion around what we believe really matters in developing the firm and giving, stakeholders, externally and internally, better understanding on how we intend to build the company in the long run. So more to come on that front. And, overall, very happy with the steps we are taking in steering the ship and with regards to business model we are taking, taking a good steps towards the future. That was my presentation. I hand over to Aku for more financial operational.

All right. Thanks, Kari. As a tradition, let's continue now to the financials. A bit of a recap. I'll then change the slides here. So let's start from the rolling 12 month top line performance shown here. Growth still continued on a yearly basis, 22% increase compared to Q2 last year, despite of the fact that we have now in Q2 a bit slow quarter, especially in some operative companies. But on the other hand newly acquired, new businesses contributed well due to the quarterly sales figures. And operational EBIT side, in line with the last quarter's rolling 12 month figure, but profitability wise, as seen here, very stable throughout the previous quarters, 26% improvement against last year second quarter. Then, still, second quarter figures, moderate sales growth, 5%. I will come back, once again, on the reasons more into in the next slides. And then also from the operational EBIT side, in line with the, second quarter last year as well as the profitability very much, level on -- on the same level. Then, this picture, we haven't had for a for a while. I think this will describes our cost efficiency in the long-term, kind of trend wise. Again, here are rolling 12 month figures. On the left, we have direct cost ratio, which, we can see that has been very stable throughout the past quarters. We have had quite turbulent and also difficult quarters in the past from the markets side, different kind of [ inflatory ] pressures, et cetera. But this shows that we have been able to quite well also level out the impacts and then move the cost pressures towards our pricing, for example. And then on the right, indirect cost ratio as well, lower in curve, which means that the indirect costs have been quite well also in control. Now, a bit up in the last quarter here, mainly because of now the exit from SANY operations. But also somewhat impacted by the by the newly acquired companies and the different cost profiles there. But overall, throughout the past 2 years' time here, very, solid, development. Then, from the organic and inorganic, sales development side, this quarter now was a bit extraordinary from the previous quarters that we have. So mainly the or purely the growth came from the from the M&As, now from Filterit and J-Matic acquisitions, especially, as well as Lamox during the end of last year and the beginning of this year. But then on the other hand, the old businesses, meaning organic growth, was negative due to the earlier mentioned reasons. And from the operational EBIT side, same here. So the contribution positive came from the acquisitive -- acquisition side, and then on the other hand, from the from the organic businesses, a bit negative development now quarter-on-quarter. Then, moving on still to business areas. Electronics first, here, 6.4% operational EBIT margin was decent one. It could happen also better mainly due to the fact that, SSN had very difficult second quarter. But on the other hand, the other Finnish operations here performed stable compared to the previous quarters and also the order book and outlook has remained very stable in the businesses. In Baltic operations, especially in Latvia, a very strong quarter, supporting very well the performance of the business area. And then finally, but definitely not the last, is the capital efficiency. 50% return on trade working capital, which is a very good improvement supported by the EBIT performance as well as the capital actions. Technical trade. Again, solid performance. Twofold, I would say. In machinery power business, first of all, strong quarter compared to the previous year's same time. And also still order book is good for the coming quarters. Then construction market is challenging at the moment. There are machineries, construction equipment business is mostly at the moment suffering and definitely soft outlook there. But then on the other hand, in Muottikolmio side, which is more from the renovation, construction market side, still very, very good, performance and also active market as we speak. Metal machines, Pronius and machinery's metal machine businesses. Well, Pronius, good performance, although being a bit below last year very strong quarter. And still metal machines is a bit softer with the outlook cost. And as I said, J-Matic and Filterit, very good 2 acquisitions, supporting very well now, the performance of the business area. A return on trade working capital, slightly, decreasing trend here. But we have very much taken the focus now, especially in the in the machinery side, on the release of working capital in the latter part of the year. And that we are, following very closely. Heavy machines, definitely the highlight of the quarter was the, the exit of SANY operations, which was closed now, according to expectations in the end of Q1 also. So that, especially the capital release side of roughly EUR 1.8 million was definitely the positive side supporting the cash flow and then capital efficiency. Although, that being still on a very negative trend, and we are definitely not satisfied on that one. But then on the other hand, Putzmeister business, solid performance with 5.1% operational EBIT in the quarter, so stable there. And, business area operational EBIT hit by the EUR 0.2 million, one off cost now during the quarter, because of the exit of SANY business. And FNB, performance, below expectations now in Q2, mainly due to the investments in our new ERP system, which definitely has not been into success until now, but we believe that those challenges are behind and we will we will benefit from the new, operational system going forward, bringing more efficiency also. And then finally, other operations, ESKP business, again, with EUR 1.2 million sales and 10% operational profitability. So very stable though throughout the past quarters. Then return on capital employed development. As we have noted in the past quarters, especially that the hybrid bond issue in the beginning of '22 has impacted on the trends very much. And now during the past quarters that impact has been leveling out already. We definitely expected that the Q2 return on capital employed would be slightly higher, but, that is on an 11.2% level, because of -- mainly because of now the performance in Q2. Return on equity, likewise, very much impacted by the hybrid issue and now a bit pressed in Q2, mainly because of the softer increased in interest expenses and that's impacting on the net profit. As Kari mentioned, net debt to operational EBITDA, very stable on a 2.4x level and cash conversion, very positive rolling 12 month figures here 96%. And that peak now in Q2 was mainly, mainly impacted by the release of cask in SANY's businesses in Finland and Sweden. And then finally, earnings per share, slightly below last year level. As mentioned, as the operational EBIT was very stable compared to Q2 last year, the slightly negative impact now come from the increased interest expenses, especially. And very pleased with the cash flow performance in Q2, 3.9% operational cash flow. And that, of course, will be the heavy focus also going forward. So that's all from my side, and now we go to Q&A.

Thank you, Aku. I've been glancing through the questions that I did post them -- publish it -- publish them also here, so you can see what the other people there on the line have asked. So categorizing these questions a bit let's start with heavy machines business area related questions. First of all, there is a question on the Putzmeister business development. So do you expect this positive development to continue forward despite economic uncertainties? I mean, I will comment the situation. So I think we've been able to maintain the majority of the leading market position in Putzmeister business in all of the 3 countries where we operate in. So we have a strong over 50% market share in all the 3 countries, and it's been a strategic priority to make sure that this is the case during a downturn also doing a coming better time or, let's say, an improved environment. We have -- I mean, we're looking at the short-term outlook. In Sweden, of the 3 countries, we have the steadiest, the longest orderbook for '23 mainly and expect to -- because of also now somewhat [ easening ] delivery times in this business, we expect to be able to deliver a good result based on the backlog that is there. The same thing in Finland, also a decent of an orderbook, not as full as in Sweden, but nevertheless, on a normal level. Also reflecting the customer base in Finland and Sweden. So the difference that in Sweden we have, to a great extent, large corporate nature customers compared to Finland were more entrepreneurial businesses. So overall, okay. Estonia is okay. Numbers are rather small for this year, but nevertheless, a good strategic steps being taken, for example, also introducing smaller motor machines from Putzmeister to the Estonia market. So I mean, yes, of course, investment uncertainties among our customers have increased. That is a clear thing. However, we continue to see activity and '23 looks quite okay. The question is then more on '24 and beyond and how that will look like with active sales support development, also aftermarket business that we have there, which is roughly 20%, 30% of profits in those companies, of course, provides protection. So confident on the long-term ability definitely, also supported by the green transformation ongoing in that business and supported by Putzmeister hybrid machines, which are market-leading in the business. Secondly, there are a few questions on FNB. One is, where do you currently stand with the operating performance and the implementation of the ERP? And when do we expect it to improve? I think there was other one also. So do we -- yes, do we expect to return to organic earnings growth already in Q3. And we are -- I mean the ERP has been implemented already, and that was done. The go-live happened, I believe, it was in April. Thereafter, some challenges to get processes running, but we are on a good track. H1 was negative operating result wise. We do expect a significantly positive second half of the year, of which signs are there already from the latest trading. So we do have a good Orderbook there and the customer we are fully booked in a way both at FNB as well as at Lackmastarn. So the situation from a customer demand side is stable. This is about production -- I mean, not only ERP, but investments in production processes, standardization of the business' processes from drawings to all the way to production flow and efficiencies. So I mean, everyone who has dealt with these type of issues knows that there are uncertainties in ramping up and how quick that comes remains to be seen. But as of today, we believe we're on a good track then, and that should already yield a positive result in second half of this year. Then I believe was HMBA, if not heavy machines business related -- business area related questions, there are a few. We continued -- electronics standard, mainly questions related to Signal Solutions. Sorry, I will scroll on a bit. Yes. So how -- few questions. When do we expect the top line to return? I mean, this was in the first place, Q2. We did already expect, as we communicated before that this would be also less temporary nature of these challenges that we have. We already do see improved performance, in particular, in SSN and in Finland on the back of the -- order backlog we have there and support at least, let's say, a stable performance. I mean, SSN is not producing red figures. It's on a consolidated SSN group level, delivering still positive okayish of results. However, we have certain signs that we are about to improve. When that will happen? We feel that the communication in the bulletin also, kind of in the coming quarters is the situation where we are. So continuously monitoring the situation, working with our customers -- I mean, the main customer that we have there, but also expanding the business we have taken the first steps, for example, expanding operations to Germany as well. Significant steps. Openings of new places, of a new location in Poland, for example, during Q2. So systematic good steps for longer-term development, yes, and uncertainty for the short-term performance is there. It must be seen in the coming quarters when that kind of improvement will flow through. But I would comment those questions like that. Then group-related financial questions to Aku. Aku, mainly your group costs decreased year-on-year. Do you expect still increasing trend this year in group cost or have you achieved sufficient level?

Yeah. I think the difference was EUR 0.1 million rounded to that. So yes, we expect that, that is the level that we will also see going forward. There are some adjustments between that allocation of resources to business areas and to kind of group functions. So that is also one impacting reason there. But yes, that is the level that where we expect that to be over.

Yes. I want to make it clear, I mean we have not adjusted -- we have made reallocations of those costs to business areas in -- starting from first quarter this year.

Yes.

And this means that the business area organization related costs are now in all the business areas in the business area numbers here. But all in all, I mean, the group costs are at the moment roughly around EUR 3.5 million, and that's roughly the level where we expect those to lie in the coming -- in the short term as well. I mean, we've taken people wise the investments that are required to support the growth and to support our businesses. And then definitely, the highest increase of costs have been seen. And you can expect a steady development on that front.

And maybe to add still to that. That as we expect group costs to be in the level that they are at the moment. Also regarding the indirect cost ratio that we saw, that we also expect that the share of group costs will over time decrease when the coming quarters come.

Then another financial question. Your gross margin improved notably year-on-year. Do you expect similar to continue?

Yes. That's again also quarter-to-quarter issue, and that was partly impacted by the newly acquired companies also that where we have a different cost profile. As we saw that slide up in the indirect cost ratio. But then on the other hand, from the gross margin or direct cost ratio vice versa. So that is one of the reason. And of course, now looking into the new acquisitions and also to Delfin that we did now in the very beginning of Q3, yes, that is the path and the development that we expect. But of course, at the same time, regarding the old businesses, keeping the cost control and monitoring that heavily. So that is also supporting the development going forward.

I mean, the gross margin lastly acquired 4 companies that really range between 40% to 90% compared to the group, below 30% still. So of course, structurally changes also quite heavily over time. Then still on group financial question. Is all the impact from salary inflation already in your numbers? Or should we expect to see some more going forward?

I would say that maybe the biggest impact and peak was already seen as the overall, the inflatory environment has been now stabilizing. But of course, inflation is something which is on a yearly basis. So most likely some increases will be seen, but definitely the highest peak is behind.

Yes, we do have this company -- very company-specific. But there are some union-related agreements there, for example, the logistics side and so forth, which will continue to yield some additional pressure. But I mean, I would comment also that, I mean, in many of our companies, we are undergoing a change of one sort when it comes to succession and long-term building of those companies. And I would say that on a company level, especially in the newly acquired entrepreneurial businesses, there is the personnel cost increase more because of strategic resourcing that is done as part of the game plans of those businesses and which have a higher impact on absolute number of personnel cost and inflation as such. Then 2 final questions on M&A. Sort of one is that we indicated that we aim to continue to acquire companies. And the other one is a bit more about how much firepower do we have. First of all, if you look at the financing situation, this is what is written here. The cash availability is quite correct. So we do have -- after the acquisition of Delfin, we do have roughly EUR 8 million of the M&A facility unused. In addition to that, we have through the recourse RCF and overdraft facilities really quite nicely of liquidity to support the business. And then also, as we communicated that the working capital improvement, of course, and we expect a normal sustainable level to be lower, of course, that will continue to support, let's say, firepower, but also -- I mean, overall, the financial standing of the firm. So we continue on a regular -- I mean, continuous day by day to screen for good companies. As we speak today, we have, on a daily basis discussions with entrepreneurs, management meetings and so forth on goal. As you have seen in the last transactions, we have geared the profile of acquired companies somewhat of, in a way, higher-quality direction or, let's say, financial profile was upwards and also entering into new interesting areas. So we do see that we will continue with acquisitions. Also at the same time, we do want to maintain a solid financial standing. So that is always a balance between -- finding the balance that how is the outlook going forward? And what are the opportunities? What are the valuation levels and so forth. But yes, we are confident that, we have already this year acquired 3 businesses, operational profit north of EUR 2 million. We look forward to, hopefully, find a few businesses more that will continue to support the growth in the short and the long run. So definitely ambition to continue grow through acquisitions as well. I think that sums it up. Good set of questions. Thank you for that. And thank you for following for this session. So we look forward to seeing you again in a couple of months. Thank you.

Thank you.

Thank you very much.