Boreo Oyj (BOREO) Earnings Call Transcript & Summary

Okay. So getting ongoing. So agenda is as normal in our webcast. I will discuss the key highlights first, and then, Aku will discuss the business area, group level performance and numbers in more detail. And please use the chat function, if you want to ask any questions, and we will take those then after the presentation. So Q3 for us was a very similar quarter than Q2 of this year. So as the headline of the presentation already said, in terms of profitability, decent performance from the Group. And from a cash flow point of view, extremely good and positive development, so cash flow falling in nicely during the quarter, as also in the first 9 months of the year. Regards to profitability, we were at EUR 2.9 million operational EBIT slightly below the comparison period. I'm happy to see that the margins are improving, saw uplift in operational EBIT margins. Gross margins of our companies continue to develop well. We successfully operating in the inflationary environment in the last couple of years and been able to maintain and slightly increase our gross margins. Now looking at this year, sales and -- sales has been in demand and demand environment has been more challenging compared to '22. And because of that, the growth on a Group level is somewhat negative during this quarter, whereas the companies we've acquired in the last year have contributed to the result as expected and positive. The firm's financial standing continues to be stable. So despite the fact that we executed one transaction, Delfin Technologies bought in July '23. Net debt to operational EBITDA supported with the strong cash flow remained at a stable level during Q3. If we look at the bit of the trending performance on our 3 financial and strategic financial targets. We've grown in the last 12 months operational EBIT by 14%. 11.2% is where we stand currently with our return on capital employed target [ has reached ] 2.5x net debt to operational EBITDA. Important to note that if we look at the numbers, excluding the already discontinued SANY excavator business here in Finland and in Sweden. The uplift, let's say, that we would have already seen a further uplift in the profitability margins to 5.9%. Earnings growth with SANY is 19% and return on capital employed is close to 12%. So although now if you look at the last couple of 2, so basically the 2 quarters, the earnings generation has been on a stable level compared to the comparison periods of '22, still looking at roughly 15% minimum annual average operational or 50% minimum -- 15% minimum operational EBIT growth. That's a decent number, as we see it. Then going a bit more further into our businesses. As I already mentioned in the beginning, happy to see the positive gross margin developments or the stable gross margin developments you see in this slide, overall in the Group level, somewhat of an improvement in particular driven by the strong performance now in the last 1 years to 2 years of our Technical Trade business portfolio. Also very important to note that if we look at the performance of our [ 22 ] companies, a majority of them, over [ 2/3 ] operate at very good profitability levels and capital efficiency levels. So looking at, for example, the important return on trade working capital metric that we measure [ our group ], while also over roughly [ 2/3 ] of the companies are clearly below the 50% mark that we basically set for our businesses. And then, if we look at the net -- more or less the negative parts of the performance, basically now in the quarter, as a result of 3 different businesses, the exited SANY business, the Signal Solutions Nordic operation as well as Floby Nya Bilverkstad in Sweden, the negative organic growth seen is because of 3 -- these 3 companies. And if we look at the future prospects for [ these businesses ], nothing has changed in our thinking with regards to the competitiveness of those companies in the mid to long term. And we are confident that we are able to bring the profitability of those companies back to the levels, where they've been in '22. So overall, majority of the portfolio continue to perform well. There are clear signs of -- or let's say, there has been improved signs of some more pressure on the demand side, so pressure on turnover in the last 6 months. But overall, a good and decent situation when we look at where our company's overall stand. Then clearly, the highlight of the quarter is the excellent cash generation. So here in this slide, you have the -- we have the last 12 months [ operating ] cash flow development of the Group. So we updated our strategic targets in Q2 or Q3, '22, so a bit more than a year ago, shifting clearly to focus more on capital efficiency and returns. And also, if you look at now what has happened during the last 4 quarters thereafter, we roughly generated EUR 10 million of operational EBIT with an operating cash flow of roughly EUR 50 million. So a very significant and a good development driven by stable earnings development, but also clearly, the reduction of working capital, roughly EUR 8 million from the peak seen in August '22. So a very nice development and a mark that we continue to move into the right direction. If we look at then the important metric of return on trade working capital, so basically, this is the -- one of the key KPIs we look at and we drive at the Group level for all of our companies. So since -- since the last -- I mean, during the last 12 months to 15 months of positive development from 27% to 30% when we look at reported numbers. If we exclude the discontinued SANY business from there as well, we are up 32.5%. So a clear 5.5% improvement there as well. The positive development, as you see here, mainly with the Electronics businesses as well as and our -- as our Technical Trade business area, whereas mainly due to the challenges related to the SANY operations, but also FNB in Sweden. The Heavy Machines have had -- has had a tough time if we look at both the earnings and cash flow generation in the last -- in the recent history. However, this continues to be -- we see a positive trend going forward with this. There's a clear signal also that the companies and our organization starts to better capture the thinking with a mindset of how to -- how important capital efficiency and returns overall are. And then, we gradually continue to and expect to see a positive development with regards to this trend. Then a bit -- a couple of words on our outlook. I mean, as you know, we don't provide guidance on a short-term level. But clearly, if you look at where -- what are the key drivers and key focus areas at the moment in steering the firm, we continue to focus as at all times on creating profits, also creating cash flow. With regards to the profitability because of the signals that we've seen during the last 6 months roundabout [ there is an ] -- we have put already some months back additional focus on cost control, expect that also to contribute during the next quarters, positively to our earnings generation. And although, we have already released quite significant amount of working capital from the existing companies, we still believe there is some room to prove the goal when it comes to reaching the sustainable normal level of working cap that, that should be tied to our businesses. So in Q2, we were at EUR 32 million roughly. Now we are at EUR 29 million for the current portfolio. There is still a few million euro of possibility to further optimize working capital and still operate at a very sustainable level. So that continues to be a very important focus area going forward as well. Then with regards to our financial standing, so we clearly want to, as we've successfully maintained a stable leverage during the last 2 years to 3 years. We want to continue on this path. And also reflecting the changes in the interest environment rather push the leverage downwards from the existing [ 2.4 ] maintained at the low end of our strategic target range. Also, then when we're reflecting our M&A activities, we have during this year completed 3 acquisitions, invested roughly EUR 10 million to acquisitions. That worked -- that important work for the longer term continues creating good new companies and targets for the Group. However, increasingly important in this -- during these times is to make sure that the financial standing of the firm remains solid and protects us for the future as well. Then finally from my side, our Board of Directors made a decision yesterday to distribute the second part of the dividend that to which there was a -- an authorization given by the AGM. So we continue on the path of paying an increasing dividend per share. So altogether, [ EUR 0.44 -- EUR 0.44 ] this year. And then, you see the details related to that, the record and the payment dates. But importantly, we see that balancing also, and we're not talking about huge [ sums ] that do not really move the needle on a Group level when it comes to our ability to continue deploying capital in -- and in an attractive manner, so feel that also [ passing ] between paying dividends and allocating capital to new ventures. This is the right thing to do as well. So that was released yesterday, the press release related to that. So that's my intro to the quarter, and I will then hand over to Aku to continue more in detail on the numbers.

Yes. Good morning also from my behalf, and thanks, Kari. I will continue with [ finances ] -- sorry about this. We have some issues with the slides here. Here we go. [indiscernible] with repetition of also, but starting from the rolling 12-month. Sales and operational EBIT development as seen from the graph, 9% growth compared to last year, third quarter in terms of sales and 14% improvement growth in operational EBIT slightly as mentioned below our strategic yearly target of 15%. Quarterly figures not going to net sales anymore here, but highlighting the improved profitability still in the quarter, operational EBIT margin improved from 6.8% to 7.1% despite of the challenges in some business units. Then how the sales developed in terms of different components, organic growth versus inorganic growth. So this quarter here was supported by the recent acquisitions that was done in the beginning of the year and also Delfin Technologies here in the beginning of Q3. However, inorganic growth side, that was unfortunately negative because of the moderate performance in some business units. And basically, same -- same development here in operational EBIT side, positive from the M&A side, but then negative from organic -- from our old businesses, so to say. Then a bit longer-term time frame and development rolling 12-month figures in the direct cost ratio and indirect cost ratio. On the left, firstly, the direct cost ratio, which says that -- that still the development in the -- in the pricing and in controlling the direct cost side was good, and that was supported also slightly by the year acquisitions and the newer companies. But as seen here from the absolute rolling 12-month direct cost base, that has come down now from the Q2, '23 should be there, so from previous quarter alongside with the sales. However, the situation is opposite in the indirect costs side when we have basically stable indirect cost, absolute amount. But when the sales was now in rolling 12-month terms decreased, that increased also the indirect cost base for the ratio. Then moving on some words from the business areas, Electronics first here. Operative EBIT margin 6.3%. That was below last year's quarter -- third quarter impacted, of course, on many, many things. But overall, from the Finnish operations side, I think the performance was still good. Overall, the outlook remains stable, although in some businesses, the demand outlook has been a bit weakened, for example, in YE -- YE Finland's case. And as mentioned before, SSN impacted largely to the numbers in Q3 with the same reasons than was communicated in Q2 already. However, the newly acquired Delfin Technologies in the beginning of July performed well and according to the expectations, as did the Baltic operations overall. So very solid performance there. And capital efficiency also good development there, despite of the fact that rolling 12-month operational EBIT slightly came down from Q2 this year. Technical Trade, very good operational EBIT improvement from last year, also stable outlook overall in all of the businesses, except for in the construction side. And there, especially in Machinery's Construction equipment department, where the current market environment definitely impacted on the figures and diluted the performance. However, still solid outlook in Muottikolmio. Machinery's Power business, still very strong performance and also what comes to the outlook, no major issues seen from that side. And J-Matic and Filterit both acquired this year or J-Matic in the very end of last year, but very good performance and supported business area there. One thing, I want to highlight here, capital efficiency, although return on trade working capitals here -- here is quite stable over the quarters, but still it's a rolling 12-month figures. So there is a bit of a delay also in that sense, but a good release of working capital according to plans that we communicated already in Q2, and there is still room to improve that side. Then Heavy Machines, again, good stable performance in Putzmeister business overall. As Kari mentioned, the quarter was negatively impacted by FNB's challenges still in the ERP implementation side and with that also the delivery capability size -- side. But that -- that we expect to [ easen up ] in the coming quarters. However, operational EBIT margin a bit improved from last year level and as did return on capital employed also from the previous quarter, and now we start to see gradually the positive development there after the exit from Finnish and Swedish SANY businesses. Finally, on the other operations, very stable through the -- through the times here [ this year ] EUR 1.2 million net sales and still the margin development, very stable despite of the some -- some inflatory currencies that we have seen during the past quarters. Then 2 very important KPIs, return on capital employed, hat is our strategic target also. As we can see now, the previous quarters have been very stable in the development and definitely not satisfied with that one. I said, SANY exit is still in the numbers and SANY performance is still in rolling 12-month numbers. But that will, in the coming quarters, will be over. However, the capital employed, if we look at that one, that has been now very stable during the last quarter, despite of the 3, 4 acquisitions that we have also done. So that also tells about the successful release in the working capital at the same time, offsetting that increase. And then return on equity, now dropped from previous quarters 11.3% level to 8.4%, and that was because of -- clearly because of the performance and also impacted by the increased financing costs because of the increased interest rates. So that impacted on the rolling 12-month figures also. Then, as mentioned before, net debt to operational EBITDA, still very stable, [ 2.4x ] level in the end of Q3 despite of the acquisition that was done now in Q4 -- sorry, Q3 and cash conversion extremely good now in the quarter 150%. And then finally, to end with on the left, we have earnings per share, operational earnings per share. And now we took also the operational net cash flow per share as a comparison. So as we can see from this graph, again, in Q2 -- Q3, where the heavy focus has been put on the cash flow and release of capital that has definitely beared fruit with -- resulting with very good operational cash flow per share. And if we then look at the gray bars there, we see a clear drop from the previous year's Q3 in terms of earnings per share. And as mentioned, there has been -- the mainly contributor has been the increased financing costs, but also, of course, the performance in the EBIT side. And one thing, I want to mention there, when we do the comparison quarter-on-quarter basis, last year, in Q3, we saw one-off financing gain from the hedging instrument that we released or issued in Q2 last year. So that was one-off in the comparison period that we will -- we will not see any more in the coming quarters. And on the right, cash flow, as mentioned, EUR 9 million release. Our operational net cash flow in -- during the past 2 quarters, heavily supported by the good performance in the working capital release. So I will end up with this, and now we go back to the Q&A. Thank you.

Yes. Thank you. Thank you, Aku. Thank you. There's a good amount of questions. I think let's start with questions looking at the history. So first of all, there is a question about cash flow improvement. The question goes, could you say a bit more about elements contributing to this big improvement? It's a good question. Mainly, I mean, the major 2 contributors to now for Q3 are related to, a, to Machinery's good performance. So I think we commented that already in Q2 that Machinery's working capital was -- one was unusually high in Q2 and early this year and thereafter successfully, we brought down working capital to levels, where it has historically also been. Some room to go still and expecting some positive improvement in the coming months as well. And then secondly, overall, the Putzmeister operations, as part of the Heavy Machines business area, also a good working cap and cash flow development there. And then thirdly then, I would say, with small, good things here and there, movements here and there as normal. But overall, I think kind of working capital and cash flow is well managed at the moment by our companies. Then there is -- there are a few questions on the business areas. So number one, let's take that. So Electronics Business Area. So sales decline despite the Delfin acquisition, how much of this was explained by Signal Solutions Nordic and how much did Delfin Technologies contribute? I mean, I would say, Aku, you can further comment, but it's mainly so that Delfin a, contributed, as we expected. I'm not going to a precise number, as we don't go to comment directly on company level figures. But nevertheless, as we expected when acquired the company in July. And SSN, it was pretty much the whole of the impact -- or seen in the Electronics Business is because of SSN.

Correct.

So -- yes, clearly. And also, there is another question related to SSN as where they’re bridging from their dialect. So how is the outlook? Since the summer, we see a -- we saw a clear bottom in the summer, thereafter, positive -- gradual positive development in Finland, in Poland as well as in -- especially in Sweden, in the Signal businesses. And we are proceeding in accordance with the plans we put in place and the estimates we put in place in -- during the summer. And basically, we are still -- I mean, compared to the strong last year, we are below those levels and expect to remain below the levels, but gradually going to the right direction and doing development work with both existing customer base, but also new customers, which we expect to strengthen the business in the long run. So we are progressing well with regards to that. Then there's another question on Heavy Machines BA. So Heavy Machines, sales declined by 24%. How was this divided between effect of SANY exit challenges in FNB and other decline? Aku, maybe you can take that.

Yes. Well, that mainly came from SANY -- SANY exit, but also -- also from the FNB side. So I would say roughly 50-50 was the sales impact, FNB and SANY.

And Putzmeister, I mean, as a result, and as already commented in the figures, Putzmeister had a good quarter and good amount of -- good amount of orders and lesser deliveries to customers during the quarter as well. Then continuing still on the businesses, there's a question on Delfin Technologies. So how is the strategy work with Delfin growing and can we say anything more on that? I mean, broadly, I mean if you look at the whole acquisition, it has -- Delfin has continued to operate, as we expected. The onboarding has gone extremely well. Also, so that contributes to the development work that we've done with regards to M&A developing the processes. So nowadays, we're getting, let's say, the basic onboarding stuff already much more quicker than, let's say, 2 years ago, and that's a very positive thing. Second positive thing is that the Delfin organization is really motivated, committed to continue to develop the company under new ownership and there are a lot of initiatives ongoing with regards to the longer-term future R&D projects, different [ cases ], development projects in the medical side, in luxury, cosmetics industry and also in the pharma industry. The strategy work itself is still ongoing. We'll take some time to iron out, let's say, priorities going forward, it's more of a selection of what do we select out of a good amount of strategic alternatives, how do we prioritize those together with the company. So more on that to come when we are ready with the work. Then let me scroll a bit forward, one question in between, is to Aku. How much quarterly interest cost is with current interest rates? How much are the quarterly interest costs with interest rates?

Thanks, Kari. Okay. Good question. And then, I already a bit open that one. But now in the third quarter, our net interest expenses were [ EUR 0.7 billion ]. So that represents the current status and maybe a bit continuing on that one. But of course, if we -- if you look at quarter-on-quarter figures, there are basically 3 components or 3 reasons for increased net financing costs. One is increased interest level overall. Second is a bit increased IFRS 16 liabilities compared to year-on-year. And the third is then the positive one-off, as I said in Q3, '22 because of the one-off gain in the hedging instrument. But [ EUR 0.7 billion ] is -- and was the expense -- interest expense now in the quarter.

Thank you. And then a final question on historical things, so there is a question on Electronics Business Area. How did the outperformance compared to the broader market in Finland and the decrease in this market that I see in the statistics that are available? Well, that's -- first of all, it is correct that you see a decline overall, if you look at electronic component sales, for example, in the Finnish market. However, it's good to remember that really extreme year -- extreme year also on a longer-term horizon when it comes to '22 overall. And if we exclude SSN, the Finnish businesses, including then Yleiselektroniikka, Finland, Noretron, Milcon, Infradex, pretty -- I mean, on those companies, the development has been okay. I think overall, we see, as we've communicated positive trends when it comes to, for example, Milcon driven by the positive demand out of the military industry. And then when it comes to the other smaller companies or smaller companies Noretron [ components ] and the Infradex, quite stable development throughout. Some challenges in -- in the -- in Infradex due to construction-related business, so thermal cameras, that goes more into the -- more to the construction end. But on the other hand, good development work when it comes to, for example, let's say, state-related customers. But to answer the question, I think we broadly are going with the market. And overall, on a on a year-by-year comparison, still are showing positive numbers in the Electronics overall. And there are -- I mean, then some future questions. There are good questions here, let me scroll a bit. First of all, so now in this webcast and in the presentation, we're saying that we've seen a weakening market in the last 6 months and how did the outlook change in Q3 in different business areas? I mean -- there is not too much of a change compared to -- I mean, compared to Q2. The similar trends are there. Everyone knows what's happening in the construction industry. We have different sort of positioning through our companies in the value chain. So positive developments on the renovation construction side, for example, with Muottikolmio. Also positive views when it comes to the Putzmeister business, especially the aftermarket, part of it, but also new deliveries, especially in Sweden related to quite a lot to create -- to do the ongoing green transformation as well. Clearly, more visible size since when it comes to the machinery construction equipment business, for example, here in Finland, as already said in Q2. And then, overall in the industry view, there is -- there are, of course, uncertainties, but overall, we have more OpEx in the businesses, we have small companies we could positioning in many of the value chains, where we are present and also a good amount of work strategically done in the companies, which we expect to protect our ability to perform quite nicely in a tougher period of time. But no dramatics there. Then still a few ones. You mentioned that costs are in focus as we did and what measures are we targeting? I mean, if we look at -- that's mainly if we look at fixed cost, OpEx and personnel-related costs, we have already done actions when it comes to some people in the organization in group-wide, where resignation and thereafter, no recruitments done. We see in the coming months also a few retirements, no recruitments to be done. So overall, on the personnel cost side, clearly, there are actions that have already been taken and will be taken. We don't see any to -- to go through it at this stage, at least through any sort of larger reorganizations. [ What's our ] -- it tells also about the confidence that we have towards the future. Of course, now we're looking at next year, we are also -- also taking and being cautious on what or let's say, designing next year's plans and looking at making triggers that what sort of actions need to be taken if market is more difficult than we anticipate. But as of today, we don't see a need to go more aggressively there. On OpEx, you can always find things to improve efficiency and expect also that we will find a significant amount altogether OpEx and fixed cost for the next year that will also support profitability next year. And let me check that if we have missed anything. Yes, there is still one question, I think, which was not answered, and this is related to working capital that we have already reduced working capital by a significant amount in the last quarters and then mentioning that, let's say, the EUR 25 million level is something we believe we expect it to be possible. And this question relates to whether we expect this to happen in Q4? No, we don't expect that to happen in Q4. I think it's a bit of a longer-term target. But we see that with these activity levels, where we currently operate, which are quite stable compared to the previous year on a pro forma basis, there is still -- there is still room to go downwards -- towards that EUR 25 million mark. But it's something that we say, will take a bit more time than Q4. Yes. I think I have taken all the questions, which we have here. So thank you, again, for participating. Thank you for the good questions and look forward to seeing you again, next time, early next year. So thank you, and that’s it.

Thank you.