Boreo Oyj (BOREO) Earnings Call Transcript & Summary

Good morning from Vantaa from the Boreo Headquarter, and welcome to this webcast session where myself, Kari Nerg; and our CFO, Jesse Petaja, will discuss the second quarter '25 highlights of Boreo plc. Agenda is as normal. I will discuss the key financial and strategic highlights of the second quarter and the first half of the year, and then Jesse will dig into further numbers and business area-specific performance. If you have any questions, please use the Q&A tool made available. Starting off with kind of key commentary on the second quarter. First, from a financial point of view, we continue to grow now for third consecutive quarter. So strong organic sales growth of 19%, of which 17% was organic. Gross margins remain stable. Now our businesses in the recent quarters, we've been trading at around 30% gross margin levels. And on the operational EBIT side, so profitability was somewhat below last year, EUR 2.2 million in absolute terms in the second quarter, below due to somewhat higher fixed costs, which we expect to be partially periodic for this quarter, and also the fact that last year's result was boosted by more significant earn-out provision releases. So operationally, our businesses performed better than a year ago, but the accounting-related adjustments impacted the quarter-to-quarter comparison. Our leverage, so financial standing improved quite significantly during the quarter or from -- to the end of the quarter, mainly as a result of the issuance of a convertible hybrid bond, EUR 10 million to Norwegian insurance company, Protector Forsikring. So leverage came down from roughly 3x to 2.3x at the end of -- towards the end of the quarter. Cash flow operation was negative in Q2. Our sales grew, especially towards the end of the quarter, quite significantly leading to rising receivables, which we then expect to come back in the somewhat slower summer months. So expecting positive cash flow then in Q3 and towards the end of '25. Looking in -- looking ahead, I mean, order books remained quite stable even though we grew on a net sales basis quite significantly. So quite good order intake during the quarter. So that provides us some certainty and visibility for trading in the coming months. However, I think a longer-term outlook is a bit more shadow depending on what's going on overall in the world at the moment, and a bit more unclarity toward next year and end of the year but coming months and order books support quite decent performance in the coming months and the quarter. On the strategic side, very pleased to see a couple of activities, the issuance of the convertible hybrid that I already mentioned, a bit more of that in the coming slides, and also, the fact that we returned to acquisition track again since mid-2023. So closed during the quarter 1 acquisition, an acquisition of Spetselektroodi AS in Estonia, a welding product distributor in the Estonian market. And then now in Q3, we have closed 1st of August, the acquisition of Elfa Distrelec activities here in Finland and in the Baltics. So really happy of these strategic developments. With regards to our long-term strategic targets, we still are not there where we would like us to be. I think operational performance-wise, we are trending in the right direction, 3 consecutive quarters of sales growth start to point us to the right direction. We do expect profits to improve in the coming quarters as well. So expecting the bottoming of our result having happened in year 2024. Returns continue to be rather, I would say, mediocre at around 8% to 9% on a return on capital employed basis. But definitely room for significant improvement, mainly while we succeed in bringing profits back and revenue back to historical levels. And development on the positive -- when it comes to leverage, positive development now, so a significant downward trend or a downward movement in our leverage ratio, so now at 2.3x, considering the impact of the convertible issued now at the end of Q2. In addition to, I would say, rather positive development of results, I think the key positive developments from the firm are -- is basically the fact that the work started 1.5 to 2 years ago in number 1, protecting the profitability of the company, reducing working capital, generating cash flow and with an objective to returning back to growth. Now we start to see the results of those actions and we've started -- we've seen a significant amount of strategic priorities met during the first half of '25. So the announced 2 acquisitions, which I already mentioned, the consecutive 3 quarters of organic sales growth. And then also the issue of the hybrid bond, which provides us firepower for completing acquisitions in the future and a lot of other actions and development actions we've taken in the portfolio. So for example, the sale of the real estate in Tallinn in Q1 '25, the separation of our largest business, machinery into 2 companies in Q4 '24 and a lot of other development actions in the businesses, which we do expect to yield positive results going forward. So I think we do -- the company is in a much better shape than it was 1.5 to 2 years ago as a result of the actions taken not only in the group, but in our businesses and in the portfolio as well. And on the back of that, we are well positioned to improve the performance and to remain on a positive trend as we've now seen the last 2 to 3 quarters. On the acquisitions, briefly noting, so as I mentioned in the beginning, during Q2, we closed the acquisition of Spetselektroodi, a company focused in the distribution of premium welding machine and automation products, a business that has been built on the back of the Fronius relationship since, I would say, the 1990s. So we do own already since '22, the sole distributor of Fronius products in the Finnish market. So this was an expansion of the relationship with Fronius to the Estonian market as well. So a strong, good reputable business, which have been in the market in a good market position for decades, operating at roughly 10% operating margins and employing 12 employees in the country. So the transaction was closed now in May '25 and onboarding is ongoing as we speak. A bit of a larger transaction, which we announced on the 1st of April was the acquisition of Elfa Distrelec sales activities in Finland and the Baltics. So this was an acquisition done -- a transaction signed with a long-term partner of ours, RS Group from the U.K. This transaction was now closed on the 1st of August, so basically last Friday, and then we have welcomed a couple of days ago, 10 new colleagues to the markets and to our facilities. So happy to see the team growing and a business with a lot of growth prospects going forward also being integrated into the business. So overall, very important that since the Delfin Technologies acquisition in mid-'23. We were now able to return back to the acquisition track. We are an acquisitive firm. We should be acquiring companies on a frequent basis. And given now the issuance of the hybrid as well, we are well positioned to continue doing that in the future as well. With regards to the hybrid or the convertible hybrid that we issued, I wanted to bring a few points. I mean, first of all, the instrument is, as the name says, a convertible hybrid bond, and it's an equity classified instrument under IFRS. It carries 10 million-paper carrying a 4% fixed interest rate for the next 4 years, providing an option for the holder of the bonds of Protector to convert the EUR 10 million to shares in Boreo at the price of EUR 19 per share. We also do have a right to redeem the bond after year 4, should the bond not be converted. But definitely, we do expect this to be -- we see this as an equity instrument, even though it has an interest rate component to it and perceive this as a really important sign from a reputable investor believing in the -- and who has been following the company for a long time, believing in the long-term value creation potential of Boreo as well. So happy to have completed the transaction, the rationale behind with the transaction primarily being this providing support for us to be able to continue doing what we're supposed to do, so acquiring companies, and developing the existing ones and supporting investments into the existing portfolio. It does -- it did, of course, improve our financial position quite significantly, leading to lower financing costs because the issue and the classification under -- the equity classification basically pushes down our senior debt financing terms, and also lowers the amount of use of leverage and other debt facilities at the point of issuance of that hybrid. So overall, really strong compelling instrument and the transaction, which we believe to be both good for the existing shareholders of Boreo, but the investor protector in the long term as well. And finally, taking a bit of a look at what we intend to do and sort of not financial guidance, but more of a focus -- priority focused guidance toward the coming months. So, on the back of the now completed actions, our focus will, of course, as always, be in the continuous development of our portfolio. So the existing companies that we own to support the development of those businesses. At the same time, also considering, as we've said, if there are some companies in the portfolio which do not meet the demand our -- or the criteria of ownership considering potential divestitures of such companies. This is ongoing work, and this is always what we -- what is entailed in our playbook. Number 2, given the increased firepower and the stable position from a financing point of view, we look forward to exploring new opportunities and seeing and potentially executing then on additional acquisition in the coming quarters. With regards to trading of the underlying portfolio and existing portfolio, as I said in the beginning, the order books remained quite stable from -- I mean, remained stable from the end of Q1, and are on a level which is higher compared to a year ago. So they do support a decent performance in the coming months. What happens at the end of the year is a bit of a question mark and toward next year. However, looking at the demand trends, there's some positive movements on the industry side. Construction overall, from our point of view, remains quite modest and stable, not showing short-term, let's say, movements upwards. But overall, the significant part of the portfolio, which is related to industrial activities seem there's a bit more positive signs, at least the way we see them. But let's see how things go, and we will, of course, act in case of significant movements up or downwards quickly to make sure that profitability remains on a decent level. So quite happy being able to continue on the path that basically executing the strategy that we have set in place. Currently, not absolute -- on an absolute basis where we should be, but we have already started to trend in the right direction, and I think we will be able to do so in the coming -- in the short future as well. With that said, I will hand over to Jesse for further review of figures. Performance.

So looking at the big picture on the financial side, as mentioned, we had a growth of 19% on a quarter-to-quarter basis, of which 17% was organic and 2 percentage points coming from the Spetselektroodi acquisition in the technical trade business area. The market conditions remain quite moderate still throughout the quarter. But looking at the rolling 12-month figures for the group, we can see that we have turned the corner, and the positive trend is becoming visible in the sales figures there. For the business areas, electronics, a bit of a mixed performance within the business area, but both Milcon and SSN continue with good results. Technical trade, good quarter as well and especially the Swedish Putzmeister business continued its strong performance. Then, if we look at the gross margin and profitability side of things, gross margins were at roughly 31%, remaining quite stable at previous quarters. We have had significant improvement in the previous years due to our both acquisition profile and then some product portfolio decisions made in the business units. But despite this, the sales mix varies a bit from quarter-to-quarter. And now especially through the partial recovery of sizable machine deliveries, the margins have been diluted somewhat from what they have been. On the EBIT side, relative profitability decreased slightly from the comparison period. This was both due to the aforementioned sales mix, then a higher fixed cost base in Q2, which was a result of both recruitments, some OpEx investments in some companies, management bonuses. And then looking at the comparison period, the '24 Q2 had some earn-out provisions released in a more significant manner than what we had this year. And looking at the cash flow profile, the rolling 12-month cash flow, as we define it, cash flow prior to debt service and M&A CapEx was at a healthy EUR 9.4 million and cash conversion at 95%. The reported operative net cash flow was EUR 0.5 million negative in the quarter. This was mainly due to increase in trade working capital of roughly EUR 3.5 million, excluding the Spetselektroodi acquisition. And the increase from -- increase in trade working capital was a result of strong revenue growth at the end of the quarter, which increased the level of receivables significantly. But all in all, we expect to take down the working capital level in H2 and the working capital management has been on a solid level so far. Then looking at the return side of things, return on trade working capital decreased a bit to 26%. This was both due to the slightly diluted margins, but then especially the increased receivables at the end of Q2. All in all, the working capital management has been on good levels. And although we see improvement potential there as well, our main focus for improving the returns is on the profitability side, where we see a clear potential to improve in our current portfolio and driving up the returns. Then looking at business areas, electronics had a sales growth of 17% on a quarter-to-quarter basis. Operational EBIT was below last year's quarter at roughly EUR 800,000, with EBIT margins decreasing to 5.6%. This was partly due to sales mix, so lower margins in the quarter, and then there's been some recruitments and OpEx investments in some of the companies. Working capital management has been on a solid level in the business area and the rolling 12-month EBIT in the bottom right corner at EUR 4.5 million has been improving during 2025. The market conditions for the business area overall remain quite weak. The uncertainty in the electronics component business has led some customers postponing investments and affecting the demand environment. Order books grew slightly from Q1, though, and they are on a good level going forward and especially Milcon and SSN have continued their strong performance. The acquisition side, Kari already discussed. So we signed the Elfa Distrelec SPA in April, and the completion was now in 1st of August with onboarding going on as we speak. Technical Trade had a good quarter with sales growth of 20% quarter-to-quarter basis. Operational EBIT grew to EUR 1.8 million. The EBIT margin declined slightly to 7.1%. This was due to larger machine deliveries, which diluted margins somewhat. The return on trade working capital also decreased slightly to 24%, mainly due to the increase in receivables at the end of the quarter, but the rolling 12-month EBIT continued its positive trend since the end of 2024 and reached EUR 4.9 million now in Q2. Performance-wise, the Putzmeister Sweden business continued its positive trend, a strong quarter there. Order books declined slightly from Q1, mainly due to deliveries and timings for Machinery and Machinery MT, but the order books overall remain at a good level going forward. And then on the M&A side, we had the Spetselektroodi acquisition company joining the group in May with the onboarding progressing and proceeding well so far. Then finally, a word on our improved financial position. So as Kari discussed, the convertible hybrid bond of EUR 10 million was issued in -- at the -- toward the end of the quarter, which due to its equity classification, it's strengthened our balance sheet significantly and has taken our existing financing costs down. We are currently in a position where we have EUR 59 million of total facilities in use, including the convertible hybrid bond out of EUR 76 million. We have a strong liquidity position and now our balance sheet is in a position where we are capable of pursuing further acquisitions once again. On the debt maturity structure on the left-hand side of the page, a majority of our debts have a maturity date in 2027. This shows the total facilities maturing then. So EUR 13 million of RCF, which is currently unused completely. Then we have EUR 12 million of our acquisition facility, of which EUR 8 million is in use currently and then our EUR 13.5 million in our term loans. Our EUR 20 million hybrid bond also has a reset date in Q1 '27, meaning that unless it's redeemed, there's a step-up in interest rates. And then finally, the convertible hybrid bond, which was now issued, has a reset date in 2030, unless converted to equity prior to that, or redeemed by Boreo in 4 years' time. That's it from the financial side of things.

Okay. Very good. Thank you, Jesse. And we continue with the quick questions. I published all of the questions here. So I think you can see and follow them. I'll try not to start regrouping them, but rather just take them one by one. I hope that's fine.

Starting from the bottom, I mean, number one, on what level are we expecting the Putzmeister deliveries to continue in Q3 and H2 overall compared to Q2 level. I think it's quite -- I mean, overall, if we look at our Putzmeister business, so meaning Sweden, Finland and Estonia, we're looking at the development, or the trading levels should be rather stable H2 to H1 -- in an H2 to H1 comparison this year. The Swedish market Nordic is supporting the entire sort of, so to say, operation quite significantly given a much more brighter outlook and a strong order book at the moment as well. We do expect a few deliveries of concrete mounting pumps to happen in Estonia, as well as in Finland. But clearly, looking at the markets, Sweden is in a better position compared with Finland, especially Finland, which continued to be a tough environment. But an answer -- straightforward answer to your question, quite stable considering the 3 markets. Number two, this is in Finnish related to management performance bonuses. If I try and translate it, the question roughly goes that, do the increased levels of management performance bonuses only impact this quarter? Or do they -- are they divided into a number of quarters? The question is -- the answer is that, they impact most significantly Q2. So clearly, so higher bonuses compared with the prior year, where basically there were no bonuses paid. So that was a significant impact on the performance now in Q2. Then what the level of management performances for the rest of the year will be dependent on the trading of the business, and the group overall towards the end of the year and then sort of normal procedures related to provision -- doing provisions and releasing those and so forth. But yes, this is one of the periodic items that we commented during the presentation, which impacted the profitability of the quarter. Continuing, it sounds that the outlook for your business in the Q2 report is rather similar compared to what we said in Q1 report. Is that the right interpretation? Yes, it is. Of course, we would like the sort of comments to come more that we say the same things quarter after quarter. But to provide a bit more color behind the answer, I think the outlook we were sort of expecting and -- or we were not expecting, we were on alert seeing what the tariff-related hassles will cause and what the impact will be in Q2. We did see very little impact out of that. So it didn't really impact -- these things didn't really impact our second quarter. I mean -- and nor do we expect those to have direct significant impacts to our portfolio. Of course, we trade -- we buy a lot of components, machines from different parts of the world, and there will, for sure, be some tariffs imposed to products supplied to us and partially to products that we sell, but we don't expect this to be major. It's more around the general uncertainty in the world that sort of shadows the development of our businesses in short term, which is quite difficult to say what the impact will be. But so far, order books are where they are. They are quite decent. They're better than a year ago, and that's why we sort of say that, the coming months, we expect to be at least quite decent. I think, I discarded one -- sorry, I think there was a question on priority, capital allocation priorities.

Next 12 months.

Okay. Yes. Sorry for that. Well, I think the priority, as we said, as both of us with, we commented, I mean, the issue of the hybrid was, of course, I mean, it was -- the convertible was driven by both the strengthening of the balance sheet, lowering financing costs, but basically the big reason behind being that we are able to continue on the acquisition path. So assuming we would find businesses which fit our ownership criteria at valuation levels we are comfortable with. And at the same time, the financial standing of the company remaining on a decent level, then we would be happy to allocate more money into acquiring new companies. There was a question which I take at the same time that -- what is the leverage range we are comfortable with after potential new acquisitions. So looking at the 2.3x leverage at the moment, given -- I mean, as it is impacted by the hybrid, the EUR 20 million hybrid we have on the balance sheet plus the convertible, of course, then we'd rather remain on the lower end of that figure or sometimes even below that. But it's all -- I mean, I think it's -- when we look at -- we make significant capital allocation decisions, we look at the standing where we are as a group, group as a whole, we look at the trading outlook of our businesses. We look at the potential returns of that new venture, whether that being organic investment opportunity or an acquisition opportunity, and sum that all up and see what's the best alternative and what's the best way going forward. Sometimes that might mean that, we -- assuming you are at 2.3x, you might be willing to take a view that we gear the balance sheet rather towards 3x if the case is really strong and we believe we can delever downwards, it all depends on a number of items. But I would say, as a guidance at this stage, looking at our leverage target 2 to 3x, given that we have those hybrid and convertible hybrids on the balance sheet, we'd rather remain on the lower end of that range or even below. Continuing, I'll publish a few other questions here as well at the same time because there were a few -- maybe Jesse want to take a few of the business part -- business questions. So -- on the Technical Trade side, there are questions why our fixed costs were up, especially on the Technical Trade. How much was driven by Spetselektroodi? And should we expect clear organic increases also in the coming quarters? How would you comment that?

I would say -- well, first of all, Spetselektroodi didn't affect the fixed costs too much. It was part of the --