Boreo Oyj (BOREO) Earnings Call Transcript & Summary

Good morning and a warm welcome to Boreo's Year 2024 Financial Review Webcast. My name is Kari Nerg. I'm the CEO of the firm; and together with our CFO, Jesse Petaja, we will recap the happenings of '24 and more specifically, the latest quarter of 2024. Agenda is briefly as follows. So I'll start looking at the entire year, painting a bit of the picture on the last 5 years. And then yes, I will take the review and discuss the Q4 events in a more specific manner. If you have any questions as normal, please use the chat function which is there made available through the platform. Starting off first with some key highlights of 2024. Overall it was a challenging year for the firm. Our priorities during the year were primarily on working with our existing portfolio of 22 companies. The overall themes and the general themes throughout the year, we're controlling costs, managing our balance sheet, so focused on optimizing working capital, and through that creating cash flow and also continuing to invest where the opportunities for growth continue to be positive. We continue to invest in organic growth throughout our portfolio. We are an acquisition driven firm. We have completed in the last 5 years, 17 acquisitions. In 2024, we did not complete any transactions due to priorities to maintain a solid financial standing. So basically, looking at the numbers, basically '24 represents, with the exception of the half a year result from Delfin Technologies and a 9 month result from an add-on acquisition to Muottikolmio made in '23, they represent basically organic development of our portfolio. So in 2024 our revenues declined quite drastically, primarily in construction related businesses. So Putzmeister operations in 3 countries, as well as in some of the Finnish construction oriented companies, in addition to that, also the development or the demand environment for some of our primary -- quite significant share of our firm with industrial exposure on the demand and customer side were tough, resulting in overall a 17% decline of sales throughout the year. We managed to secure and defend our profitability through actions taken both on pricing and improving cross margins, but also significantly reducing fixed costs, and thereby achieved a EUR 6.8 million operational EBIT, 5.1% in relation to sales which we think is a decent achievement in a tough environment. Clearly the positive part of not only of '24, but also the last 2 years including '23 was that we've been able to manage our balance sheet well and creating an operating cash flow of over EUR 20 million in the last 2 years, and now, especially the last quarter of '24 strong EUR 7 million operative cash flow. Our financial standing continues to not be where we exactly want it to be. Leverage is too elevated, even though it came down from Q3 '24, but now landing at the end of the year to 2.8x measured looking at our leverage ratios, our net debt divided by operational rolling 12 month EBITDA. This is something we continue to manage in the coming quarters and throughout the year intend to improve and target to improve our financial standing. Brief look at our strategic targets. As the headline says, we have work to do to reach the levels where we want to be. We do think that we have bottomed now in our profit generation. So we came down in the last couple of years from roughly a level of EUR 10 million and operational EBIT down to roughly EUR 7 million now in FY '24. We do expect the '24 -- '25 to be better year compared with '24 on the back of the investment, or the back of the actions we have taken in improving our cost competitiveness, taking cost out and also the improved order books we've seen compared to last year. However, if we look at the returns, return on capital employed being at 8x, rough 8% and leverage being closer to 3x taking into consideration that we have a EUR 20 million hybrid on our balance sheet and our leverage is clearly too elevated compared to the stand -- to the position where we would like to be as a firm. Now showing a couple of slides from the last 5 years. So developments in from 2020 to 2024 and focusing on some of the key developments in the last year. As already mentioned the big headlines, sales decline, gross margin decline in terms of absolute euros, but an improvement on cross margins from 28% to 30% in '24 and also -- and a decrease of fixed costs roughly by EUR 2 million. That basically brings us bring -- that brought us to the operational EBIT of EUR 6.8 million. The most positive developments in the portfolio throughout the year, I mean -- were overall seen within our electronics business area, which improve profitability compared to '23; especially, Signal Solutions Nordic had extremely strong second half of the year and was able to go above the expectations we had going in the year. So we developed a positive year after a somewhat over challenging '23 with SSN. In the similar way, with FNB, our timber truck mounting business in Sweden, we had a tough '23. Really strong operational development thereafter, throughout the latter part of '23 already, but also now throughout '24. So reaching record sales in '24 and very importantly also, being able to reduce working capital and thereby generating good cash flow in '24. The challenges we experienced in the portfolio are primarily in the businesses which have been part of the firm for a long period of time. So the YE businesses, our electronic component trading businesses here in Finland, but also in the Baltic countries, machinery and then our Putzmeister businesses with exposure on the construction market. So overall, a decline of over EUR 30 million out of this -- out of these portfolio companies. There on the other hand, we succeeded rather well in defending profits through cost efficiency measures, but also then on the balance sheet side, managing working cap well. One note I brought to the slide is the last comment there on the slide, bottom right corner. I mean, if we look at the profitability levels in our portfolio, the portfolio is a healthy fund from a profitability point of view. Probably 1/3 of the companies operate at plus 10% EBIT levels, the other 1/3 of the businesses around 5% to 10% EBIT levels. A few, closer, I mean between 0% to 5% and only a few companies on the smaller side generated a loss measured on EBIT terms. So even though overall the picture is not something we're happy with, the portfolio generates a plus 7 -- roughly 7% operational EBIT in a tough market like that, which is a good sign of the quality of the portfolio and the improved trend it has also seen throughout the last couple of years. As already mentioned a few times, a very strong operative cash flow, not only in '24, but also in 2023. So overall, close to EUR 24 million operative cash flow in the last 2 years, basically and largely driven by the fact that we reached our target. We've been communicating the last 12 to 15 months, I believe. So basically, we were able to bring working capital to a level of EUR 25 million at the year-end '24. We do expect, in early '25 some build-up of working capital to happen. But going into '25 intend to maintain a well optimized, working capital throughout the portfolio. Returns, I mean, we basically -- I mean we follow the 2 key metrics looking at with the return profile on [Technical Difficulty] on the group side is return on capital employed, the return on trade working capital metric that we use to measure all of our businesses in the group, looking at, as I will show later on, the electronics portfolio is operating at a very healthy plus 50% return on trade working capital level, whereas now, due to challenges with profitability on the technical trade side, our returns have come down quite significantly in 2024. The balance sheet is managed quite rather properly, but the key focus is clearly on investing in growth, creating and aiming to create sales growth, and through that then also improving profitability, which in turn then will improve the return profile going forward as well. Last 2 slides, we brought something new, I think which we haven't looked at before. Now we start to have some years of track record, so we start to be able to also sort of look at somewhat of larger trends or longer trends, and how we not only have developed in terms of P&L and balance sheet, but then also looking at developments and our track record from a capital allocation point of view. So basically here on this slide, you see a summary of all cash outflows -- cash outflows and cash inflows, starting from the mid of 2020, which basically is we see as a start of the Boreo era. So starting from the Muottikolmio acquisition we did in Q3 2020, we have all together, invested around about EUR 50 million to acquisitions, including the earn out payments we have made throughout the years. Looking at the uses of cash CapEx doesn't represent too big of a shares of our cash outflows given that we are a capital-light firm. Overall, the requirements to make capital expenditure are quite modest. And then looking at basically the funding side of things roundabout, closer to EUR 40 million has been funded with operative cash flow. We've also issued equity as part of transactions. Also made a personal share issue in '25. Those combined, close to EUR 6 million from a financing point of view are the sources of cash and what we've used. And then at the end of '24, we still had a EUR 24 million -- 2 hybrid instruments on our balance sheet. But now, as we speak 30th of February, we paid the EUR 4 million the old hybrid back. So now in 20 -- now basically continuing with the EUR 20 million hybrid on our balance sheet. If we look at the desired state and our goal, clearly, the primary goal is to be able to fund majority of acquisitions and all other cash outflows with operative cash flow. Why indebtedness has gone up is primarily due to the fact, then, compared to our own expectations, it is basically the loss of our Russian business and the impacts thereafter which put pressure on our balance sheet from late 2022 onwards. But in any case, a good sign of the fact that the portfolio has generated operative cash flow, which we've -- as we should have been primarily allocating into acquisitions throughout the last 4 to 5 years. And finally, before handing over to Jesse for Q4 review, looking at the acquisition track related to the EUR 50 million roughly invested since Q2 2020. I mean, if you look at in '24 in terms of operational EBIT, the new companies you see being acquired since 2020, generated roughly somewhat a bit over EUR 5 million of operational EBIT in year 2024. So nowadays already, especially now more cyclical part of our business being the heritage portfolio, basically the acquisitions we made have supported our profit generations, and the companies have supported our profit generation very significantly. Looking at the return side of things, in average, looking at 3 year average returns, we have generated a return of 15% for the EUR 50 million invested throughout the last years. Not quite where we expect it to be. So the multiple or the other way of looking at it, the return expectation has been at 20%. Now we are at 15%. However, once market conditions improve and the development actions we're taking in the companies, they start to kick in over time, we do expect that once we look at these sort of crafts in some years down the line, we have a good chance of reaching those initial investment targets we have set at the point of acquisitions. So overall, a rather decent track of acquiring companies being able to operate them, transform from an entrepreneurial world to -- continuing in an entrepreneurial world, but in a different ownership setup and also then creating confidence of the fact that the business model works and we are able to allocate capital with good expected returns for investments. So that's it from my side, and then I hand over to Jesse for Q4, please.

Yes, thank you. So looking at Q4 a bit more closely. In general, the quarter went quite as we expected. After several weaker quarters, we returned to growth. So net sales grew by roughly 6% from the comparison period. Our gross margin levels were a bit lower in Q4, did some higher volume deliveries. But EBIT was at EUR 2.1 million, which was on the level of Q4 '23. This was in addition to sales growth supported by our cost measures which we took earlier in the year, which in Q4 realized that roughly EUR 800,000 in lower fixed costs compared to the previous year. In addition to decent profit generation, we also managed to generate strong operational cash flows of roughly EUR 7 million. This was supported by our working capital management. We achieved our targets for inventory levels and bringing working capital down. To year-end, we were at EUR 25.5 million, and this increased profitability and then strong cash flows also decreased the leverage from the previous quarter. But as Kari mentioned earlier, the level is still elevated at 2.8x. If we then look at the trading outlook and order books, order books decreased slightly from the previous quarter, but looking at the comparison period a year ago, we are at significantly higher levels going into 2025. We had some sizable orders postponed to 2025, which we expect will materialize in the first half of the year as well. And if we look closer on the business area levels, electronics, they had a very strong end of the year. Their sales growth was 31% compared to the previous quarter in '23 on the comparable quarter. This was largely due to SSN. And as Kari mentioned, they had significant investments from their largest customer materializing. And then Milcon had a very strong year, both full year compared to '23 and then Q4 also achieved net sales growth compared to the year '23. In general, Milcon we expect this will continue going into '25 as well with strong demand on the defense industry side. The margins, as said, they were a bit lower on the group level. And this comes largely through the electronic side of the business, where SSN had the high volume deliveries in the last quarter. The business area managed to reach 8.5% in EBIT margins, which was very strong level. EBIT itself was EUR 1.7 million in euro terms, which represented a growth of almost 50% from the comparison period. And this shows in the rolling 12 month EBIT figures then in the bottom right corner, the profitability has increased on a rolling basis and then combined with successful working capital management, the return on trade working capital has increased quite meaningfully from 43% to roughly 52% in Q4. And if we look at businesses outside of SSN and Milcon, performance was a bit varied in Q4. So YE businesses, for example, Finland exceeded forecast in the last quarter, but had a challenging year in total in a difficult environment. Then, especially the Baltic countries continued facing difficult market conditions and continued with decreasing sales compared to the comparison periods. There we don't see any immediate changes in the operating environment. But the company have done a good job of managing working capital in this environment. Due to these operating challenges and then a broader review of operations, we in Tallinn or our Estonian operations, we closed our consumer business and did a reorganization of YE International, Estonia, and this resulted in decreased need for space for the company to operate in, and we have initiated a sales process of the company-owned premises in Tallinn, which we expect will materialize in the coming months. Then for the other businesses, still varied. Noretron, underperforming; Infradex, meeting expectations. Delfin, our health technology company, had a challenging quarter, but the company continued its product platform reform which was initiated last year. They've done work with renewing their global distribution network, continue developing their selected future strategic paths and in general have a quite positive outlook going forward with the opportunities with the business. But as a whole, Electronics performed well for both the Q4 and full year. Then on the other hand, if we look at technical trade, we had a modest performance in the last quarter. Challenging operating environment continued. Sales declined by roughly 11% compared to Q4 '23. As Kari mentioned, for the full year as well, this was largely due to the machinery businesses and Putzmeister businesses. Here, profitability for the business area reached 4.5%. This was reflected also in the quarter-to-quarter results, which was EUR 900,000 for Q4 for the total. This was roughly 45% decrease from the comparison period. So a really tough quarter. If you look at the R12 rolling EBIT figures, these have been declining this year and reflected in the return on trade working capital, which was at 24% at year-end, even though the business area here as well did a very good job with working capital management and bringing inventories down to our targeted levels. On a more business unit-specific side, the business, Putzmeister business is suffering still in Finland from a tough market. This was both in Q4 and during the whole year. We expect the demand outlook to remain uncertain going forward as well. Sweden fell a bit below expectations in Q4, but had a solid year all in all. They defended profitability very well through their strong aftermarket sales. And then they have developed a strong order book for 2025, part of which we have communicated earlier, large orders from a customer. In other businesses, FNB was mentioned in Kari's overview. They had a very successful end of the year as well, high sales in the quarter and all-time high sales for the full year '24. They have managed to get their ERP implementation done, which has presented challenges previously for the operations. They've done a successful reduction of inventory levels and developed a solid order book into '25 in addition to already reaching record high sales in '24. Then for the other businesses, going quickly through the largest business unit in the business area. Machinery Power performed decently in Q4. Machinery also completed the separation of the metal machining business into its own unit, Machinery MT, which had a challenging quarter at the year-end. This was as opposed to Pronius, which is in the welding product business. They have also had a challenging environment, but performed well in the last quarter and has been defending profitability during the year very well, also due to their strong market position. On other businesses, Machinery construction, for example, performed up to expectations, but the environment is very tough. Muottikolmio construction side, same thing. They had a tough Q4 and demand outlook still continues to be quite moderate. But Muottikolmio did a good job during the full year, defending profitability as well, both on the business sales mix side, defending margins and then cost measures during the year. The remaining businesses, varied performance. Filterit performing up to expectations and taking growth investments, finding good opportunities to grow the business going forward. J-Matic having a tough year due to demand from the largest customer, but also working on expanding the business and finding good opportunities. ESKP, similar. Q4 was a bit tougher than the full year in whole, but they have also successfully won new business to expand going into 2025. But in general, looking at the 2 business areas, Electronics has been strong this year and Technical Trade has had a tougher operating environment, largely due to Putzmeister businesses and then machinery and the construction-related stuff. If we then jump over and take a look at our financial position, our debt facilities to be more accurate. We, in December, agreed to extend our credit facilities by 1 year, the maturity from 2026 to 2027 and simultaneously agreed to postpone loan repayments of roughly EUR 2.5 million from 2025 to 2027. So now at the year-end '24, we had a liquidity of EUR 24.5 million, of which EUR 9.7 million was cash and the remainder was unused short-term credit facilities. Going into '25, we have scheduled debt repayment of EUR 2.5 million. And then as Kari mentioned, and we notified we have redeemed EUR 4 million of the old hybrid on the 10th of February, which was originally issued in 2022. So now we then have our maturity leading towards 2027, where we have, at that point, EUR 60 million left of our term loan, our acquisition facility, of which EUR 6.5 million is of use today. Then we have a reset date of the new hybrid. And then there's a revolving credit facility up there showing us EUR 4 million, which is unused as of today. So if you look at the whole facilities which we have, EUR 73 million at the year-end, EUR 54 million was in use, which includes EUR 24 million of the hybrids, EUR 4 million, which now was redeemed. Then moving onwards into our outlook going forward. Order books, as mentioned, coming into 2025, we are at significantly higher levels than in the previous year. So decent start to the New Year. The cost measures we have taken during the year will support operational improvement on an annual basis. We have lowered fixed costs by roughly EUR 2 million. And then we have continued positive outlooks in several of our portfolio companies where they have interesting opportunities to grow that meet our criteria and the companies have been developing these even during the year where our focus has been to focus on profitability and working capital management. So to summarize, the message is the same as in Q3. In the short term, we continue executing on our back to growth plan. We have successfully managed the cost programs. We have managed the working capital release, reorganizations are completed. We continue investing and developing our existing companies where we have opportunities to grow with projects that meet our criteria and then where we see that companies do not meet our criteria. And in the short or midterm, we continue to evaluate if we do reorganizations, which we have communicated that we are willing to do if the case be so. That's it for my part for Q4.

Okay. Thank you, Jesse. I think there is some questions. There's a new platform in use, I think not only in our case, but we try and cope with it. So looking at the questions here. I'm not sure if you see them, but we'll go them through one by one. First question is you've done -- reads like this. "You've done some OpEx investments, including recruitments. Can you give some indication of the net impact from the cost cut actions and additional spending when thinking of '25 compared to the year-end 2024 situation?" Yes, it is correct that recruitments have been taken. I mean, partially already at the end of '24, but now going into '25 as well. So some examples, including, for example, Delfin Technologies during Q4, investments there into organization. Same thing with machineries, auxiliary power business where the demand outlook on the back of data center, industry developments and security of supply topics, for example, these sort of items and actions we've taken to prepare for growth. It is a -- partially now going into '25, there is some pickup and an overall inflation picking up to a certain extent when it comes to personnel cost, especially. And of course, in a year like '24, the level of compensation bonuses or similar have also adjusted downwards. So going into 2025, there will be provisions on the balance sheet going forward, expecting for somewhat different performance as compared to '24. So there is some pickup, definitely not back to the levels where we were looking at fixed costs in total, but let's say, increase of fixed cost overall is something we expect to happen in '25. If then at the other hand the market would not support us to the extent that we expect at this stage, then of course, there's always an ability to flex downwards as well. So that broadly, I believe, answers the question. "The second question is that do you foresee the significantly better development of SSN continuing this year? What does the order book look like?" Overall, the outlook is positive, especially in Poland. And in the Finnish market, the outlook is rather positive, somewhat more challenging looking at the U.S. market and Sweden. But overall, as SSN Group, rather positive. We do we do see that there is a chance to continue operating at close to levels of where we were in 2024, so which is closer to levels of '22 as well and '21, which was strong as opposed to a tougher '23 we had in between. But looking at phasing and so forth, Q1, there was a certain backlog that was brought in successfully in Q4 '24, taking something out from Q1 now '25. So we do expect as in '24 as well that the performance of SSN will gradually improve during the year. Then there's a third question of, "what kind of working capital buildup do we expect in the near future?" I mean we're -- I think the -- in general, I would say that if we would remain close to the current activity levels where the business is running from a net sales point of view, we're looking at a couple of million euro trade working capital swings in the business. Of course, some timings of larger deliveries and machines can deviate and increase the swings as well. But the EUR 25 million mark is roughly -- I mean, we don't see significant opportunities with this portfolio to squeeze much more without jeopardizing our ability to serve our customers well. But basically, I will see in the beginning of the year, some buildup as we communicated to be happening.

And I think it will obviously grow a bit once we hit the growth we target. But I think in general, we run a tighter ship now. So the absolute or the relative level will be lower going forward than it has been historically.

Yes. Yes, for sure. Then continuing, "can you provide an update on the timing of Putzmeister deliveries in Sweden?" We do -- as we see the world today, there is a possibility that first deliveries will happen during Q1. Now looking at the delivery schedules, the first deliveries of a significant batch we won would be time during Q2 and Q3 this year. However, due to challenges on the supply of chassis to the pumps we're about to deliver, it has taken some time and it's not 100% certain yet what the timing will be. But as we speak, hopefully, starting from Q1, then going into Q2 and Q3 being able to complete already a good sizable chunk of those deliveries. Then we will continue. I think now we're coming into electronics-related questions. The question goes, "your electronic sales increased significantly in Q4, especially driven by a couple of companies. Could you comment that a bit more? Were there something exceptional? For example, SSN was quite much in '24. Will this level continue? And do we see this demand level?" Well, I commented already part of that, SSN. Q4, I'm looking at Q4, Milcon has historically been a company that has always been generating majority of its profits in the second half of the year and especially going into Q4, and this happened as well this year. So there's clear tendency to that with SSN, which was now a major contributor to the result. There's no similar type of typical seasonality in the business, but it's more on how timing of investments will happen in different years. So -- but overall, I would comment that the outlook for Electronics business is quite stable, positive signs on the defense side, in particular, the industry side continues to be stable. We do not see a decline, but not either a broad positive trend as we speak, looking at the market. But given that we have somewhat better order books compared to -- and order books, which are in the level of the last 6 months roughly, that provides us some confidence for the performance in '25. Then a detailed question on Baltic consumer Electronic businesses, how visible will this be in sales? Well, it is not material. You cannot -- it's so small importance in terms of profit and loss statement that it is not something I would advise not to consider. The impact is more on the balance sheet side. So us being able to reduce working capital as a result of ending that business and lowering inventories, which we have already done to quite a good extent so far. Then this question on order book still continuing. "How much are we up? How much of the growth in order book on a year-on-year basis is the PM business?" It plays a role. It has a good share of that, but it's not the entire growth. So we do see overall in the portfolio a positive development. So order books are up in both business areas, excluding PM Nordic. So electronics up versus Q4 '23 and also technical trade up without -- if PM Nordic is excluded. Then on the financing side, the question to, Jesse. "How did the changes in debt repayment schedules affect your debt conditions? Does this bring increased costs? Did covenants change?"

Yes. Well, as you most well know, we don't comment on our specific covenants and debt conditions, but the changes did not affect the current debt terms we have. So no material effects.

And on the cost side no changes there.

No.

Always some costs related to topics of changes as part of senior facility agreements, but not going forward. So rather onetime impacts. Then there's a question on fixed cost -- fixed expenses developing in '25. I think I answered that question already before, so increase versus '24, but not back to '23 levels. Then last question which we have here, "are there businesses where you still see demand going downwards?" Not really. I think the sharpest declines have been seen, I mean, especially on construction side, where it's been tough in all markets. But if we look at the develop -- the situation now, basically, our expectations is that we are seeing growth in these businesses, even though modest in some of the cases, but anyways, growth going forward. I don't think we have any single business that comes in the portfolio where the expectation would be or the signs as we see the world today that there will be demand going downwards. Of course, there's plenty of amount of uncertainty in the world and things might happen during the year. But overall, that gives a feeling that the sort of there's a basis to believe that we would have bottomed in terms of demand now. But let's hope for the best and continue executing on things we can influence. So I think that was all. If there are no new questions, then we would, as always, thank you for taking the time. And in case of any additional questions, then just feel free to reach out directly. But I appreciate the time and all the best for '25 when we speak again latest after the Q1 results are out. So thank you.

Thank you.