Boreo Oyj (BOREO) Q4 FY2025 Earnings Call Transcript & Summary

Good morning from the Boreo headquarter. Welcome to the Q4 '25 results presentation. I will start the session here shortly, briefly. The announcements that we made earlier this week. So, following the press releases and communication from Q4 '25, our new CEO, Tuomas Kahri has been announced to start in this position now in the beginning of April '26. So basically in 1.5 months time. In addition to Tuomas joining the firm as CEO, he will also lead the one of our two business areas, which is the technical trade business area and following the changes in communication, the management team from first of April '26 onwards will consist of four individuals: Tuomas as the CEO and Head of Technical Trade business area, Mari Katara as before, as the responsible for People and Sustainability topics; Tomi Sunberg of the electronics business area; and Richard Karlsson as an SVP of the technical trade business. So just to clarify briefly, there's been a few discussions in investor forums on this. Basically, with regards to the company-related responsibilities from the group side, the changes Tuomas will head in the future in addition to being responsible of the entire Technical Trade business area, a few businesses in the portfolio. So he will be chairing those companies on the electronics business area side, it is Tomi Sunberg and also Joni Sollo, our Vice President in the Electronics business area, who, both, together chair the electronics businesses and then on the technical trade side in addition to Tuomas and Richard covering roughly half of our companies within the business area is the two gentlemen, one called Joonas Korkiakoski, the existing or the current Managing Director of Filterit, who's been promoted as the Vice President of Technical Trade ; and [ Mike Baza ] in Estonia and the Managing Director of our Nordic business who are the Chairman of our businesses. So this is just, as a clarification of the responsibilities following the changes announced. In addition to the changes related to Tuomas and the management team, we've appointed as we -- the company has decided not to recruit a CFO for the time being, following the coming departure of Jesse from the firm and we've appointed a gentleman called Rafael Kosmonov, as an interim Head of M&A and financing -- in head of M&A and financing position. And [ Sami Ava ] who's been with us since year 2020 responsible for our -- among other things, our external financial reporting to date. There are additional, let's say, responsibilities for some recovering also internal reporting and other items in the future. So these are very much the changes related to the organization on the group side that have been communicated and the organizations eagerly waiting for Tuomas to join and for the new leadership team to take the company forward to the next phase of growth. With that said, we'll continue to the presentation we recap the '25, a year as a whole. Briefly, the key highlights there. Yes, they will continue with some specific comments on Q4 '25 and also related more in debt related to our business areas and businesses. And then I will end up with a couple of words on the outlook for '26. And as usual, we will finally take questions that you can ask during the session. Moving on once we get the slides working again. So year 2025 in brief. We're happy to see that we were able to return the bank company back to growth following a challenging year '24. So growth of sales, 40% increase of operational EBIT by 17% is a strong result in continued challenging operating environment in addition to improved revenue and profitability development. We continue to generate strong operating cash flow. So altogether, if you look at our track record in the last 5 years, of managing our balance sheet and working capital, and we continue to successfully manage the balance sheet. So over the cash conversion of 83%, with the support of the leverage -- with the support of improved earnings and also the financing arrangement we completed together with the Norwegian insurance company protector, the EUR 10 million of convertible bond. Our financial position improved significantly in the last 12 months. And now excluding for the hybrid to hybrid instruments we have on the balance sheet, the net debt to operational EBITDA stands at 2.1x at the end of '25. Following a no acquisition year in '24, we're also pleased to return back to executing growth via acquisitions and buying two companies first in Q2 as well. So I was in the middle of commenting our long-term track record on strategic targets. So last 5 years, if you look at that, we've been growing profits on an average 17% basis. So above our 15% target. However, if we are looking at our capital efficiency targets and leverage we have financial standing, we have work to do. The drivers under the playbook improving returns in our situation, primarily going forward, will be around being able to grow the business, grow profit. The balance sheet, even though it does continue to provide us with opportunities to optimize our balance sheet to a certain extent. I would generally see that we're managing the balance sheet in a rather good way in the firm today. So definitely, going forward, the focus will be primarily around creating growth and growth of sales and through that improvement of earnings as well. With regards to '25 still, if we look at how we managed to improve profits by 17%. That's primarily driven by to 14% sales growth, of which 11% was organic. So looking at the contribution from -- we did see a 3% contribution to the sales growth from the acquired two businesses, however, due to mainly the integration approach is ongoing within the ERS business. There was pretty much no additional profit coming out of these two acquisitions. So going forward, as we're getting stuff in order and processes in order within the newly established RS business, in particular. We do expect for '26 a gradually improving performance of that new platform, which I think is nicely set up for long-term success. The sales and profit improvement both was driven by strongly by our technical trade business area. In particular, there were companies, the largest business machinery and the other spun off business from the old machinery, machinery and the entire Putzmeister business portfolio that improved trading in the course of '26. In addition to being able to -- having been able to record sales growth, we were able to continue improving our gross margin profile. So extremely pleased to see the long-term development where you see a drastic uplift of the margins or gross margins in the last year, primarily, of course, related and due to having acquired businesses at higher margins, so an improved quality of businesses within Bore umbrella due to the capital allocation and the investment criteria we put in place in the last years. In addition to that, we've done, as you might remember from the history, quite a lot of stop and accelerate decision, so to say, within the portfolio and within our companies, we closed down low-margin businesses than decisions to invest in growth in businesses with higher quality service, higher quality, higher margins in general. So pleased to see that this trend has been positive in the last years. Now of course, there's some impact of the sales mix as well. We will, hopefully, in the coming years, see an increasing volume of higher and large volume deliveries of machines is in certain businesses. And if that's the case, those business will dilute the gross margin somewhat, but definitely not expecting to go back to the historical levels, but continue to operate with this existing portfolio close to the 30% mark there. As I already said in the beginning, I mean, looking at cash generation in the last 5 years, we're close to the 6 years here altogether. We've generated operative cash flow close to the total sum of operational EBIT generated during this period. So quite a strong track record and there in managing mainly working capital. Now at the end of '25, trade working capital stood at roughly EUR 29 million. We expect there to be some optimization to be done going forward as well. Of course, then depending on our ability to grow the business. There's some investment that needs to be carried out inventories as well, but we do expect us to be able to continue managing balance sheet quite prudent. Two slides which have a bit of more of a longer-term perspective, I wanted to note here again that -- I mean, following the return to M&A with the two priorly mentioned acquisitions. We've now deployed roughly EUR 50 million of capital into acquiring into acquisitions the last 5.5 years. Even though we're not quite there where we expected to be from a return point of view at this stage with regards to these acquisitions, we've generated a tough environment, roughly a plus 15% average return for these acquisitions going forward, looking at the positive outlook for example, for our defense business milk on it technologies and generally a stable portfolio and good portfolio companies we've acquired I think there is a clear potential for the -- in the future also to sort of post quite a lot of improved return metrics as well. So the engine -- the second of the two -- the one of the two value creation engines here, the allocation of capital to buying companies at reasonable valuations with high-quality characteristics. I think this is a good showcase that even with all what has happened here in Finnish and Baltic economies in the last years. We've done a rather good job in creating returns for the capital invested. And finally, before turning over to Jesse, a brief look to the capital allocation track. So you can see from here that the big here from uses and sources of capital point of view are basically the two big that's there. So the EUR 50 plus EUR 50 million from an EBIT point of view deployed to acquisitions, which has been primarily funded by the operating cash flow of the -- from the businesses. So the plus EUR 50 million in the last 5.5 years. In addition to that, mainly due to the losses related to the loss of our Russian business and challenges will be tapped into strengthening to strengthen the balance sheet through the hybrid instruments. And I think going forward, definitely, the objective is to arrive into a situation by further deleveraging and strengthening the balance sheet to be able to fund more and more of the growth -- the acquisitive growth through cash flows of the business. But looking at all that, I'm pleased to see that we've been able to now in the last years to improve or increase the importance of cash -- operating cash flow in financing the growth initiatives as well. With that said, Jesse, please take over and then review the Q4 part.

Thank you. So a brief look on the Q4 financials. This was our fifth consecutive quarter with organic sales growth, sales being EUR 46.3 million in the quarter, which represents a growth of 18% from the previous year. Of this 12% was organic growth, which is a very good performance from the portfolio. Gross margins were 28%, slightly down from last year. This was mainly due to sales mix and some larger deliveries in the technical trade business. Operational at 2.8 million, a very strong 33% growth from last year with also margins improving up to 6% on an EBIT level. This also, as Kari mentioned, for the full year. On the cash flow basis, we had a very strong cash conversion of 176%, which was supported by reduction of net working capital of close to EUR 3 million in the last quarter. On top of this, order books also continued growing both compared to the previous quarter and then last year's and we are seeing signs of some improvement in the industrial side. For the demand there, while the construction sector continues to be on the slow side at least in our portfolio and distribution businesses. On the return on capital employed, we also had an improvement up to 8.8% for the last 12 months. and return on trade working capital due to the increased profits and management of working capital has also increased to 27.2%. In Leverage, as Kari mentioned, due to increasing profitability and strong cash generation going to other direction when combined with the convertible hybrid that we did during the summer in '25. And if we look at the business areas on a closer level. We have a bit of a division here how Q4 went for the business areas. So electronics defended their profitability somewhat despite a decrease in sales. So Sales decreased by roughly 13% from last year being at EUR 17.2 million. This is mainly driven by lower sales at SSN, which had a very strong Q4 in '24. Operational EBIT, similarly at EUR 1 million, with EBIT margin decreasing to 5.8%. Despite this, the business area had a quite solid working capital management during the quarter and the year return on trade working capital being at a 44% level. And on the business side, Milcon still performing after expectations and is the same continuing with the solid performance with both of them expecting a positive 26 development as well. The short-term outlook in general for the business area is stable, although there is uncertainties in the environment, and we see that in some of our customers in the broader sense. Order books on the other hand, on a positive side, continued increasing from both Q3 and last year, which will then support us going into '26. And the business area is implementing efficiency measures, which we see continuing supporting profitability going into '26, taking into account that we have some investments in H1 coming up in electronics involved projects and such, which will somewhat be visible on the short term, but improve profitability for the business area in general going forward. Then if we take a look at Technical Trade. On the other hand, which had a very strong sales growth, a significant increase in profitability. So sales grew by roughly 50%, up to EUR 29 million. This was driven by strong performance in the whole business area in general, but especially due to machinery MT and the Bootmaker businesses having strong deliveries at the end of the year. Operational EBIT, very strong 2.2 million grew by 143% from last year, and EBIT margin similarly increasing to 7.4%. The business area has also due to the increased profits and then well-managed working capital, increased return on trade working capital to 30% by the end of the year. And in general, the positive performance comes from several of our businesses, but especially the company is serving process and mechanical engineering industries performed very well, and the profitability improved progressively towards the end of the year. Order book side, similar story to electronics grew from both Q3 and Q4 from last year. here, we had an especially strong growth in order books for both machinery and PM Nordic into '26 with some larger deliveries being weighted towards the end of the year or H2 '26. Short-term outlook, in general, overall reasonable, but there's progressive improvements in different clusters and sectors within the business area, which are developing very well. And then as mentioned, the construction sector is coming back a bit slower. And finally, for our Q4 recap, I revisit our financial position. This is unchanged from Q3. So we have total facilities of in use or at our hands and EUR 59 million of this is in use, excluding some commercial guarantees and credit facilities in some of our subsidiaries. But from these, our senior debt as maturity dates in '28 as discussed in previous quarters, this was rolled over from '27. And then our main focus for the financing in the coming year and 1.5 years is our EUR 20 million hybrid, which has a reset date in Q1. But overall, the liquidity position is solid on a solid basis going into '26 and our financial facilities are in a good place. So we have EUR 5 million of debt repayments coming up in '26, supported by from cash flow generation and good liquidity position. That's it for Q4.

Okay. Thanks, Jesse. We will -- before going into questions, which have been posted now and I've published all of them in the portal as well. summing up the sort of the outlook, which we both sort of commented here. So I mean we see that the position going into '26 is clearly better than the year '25. The order books, our order books, as Jesse mentioned, involved on the business areas are stronger compared with the situation a year ago, also the same goes comparing that to the last quarters. We do -- I mean, generally, the market conditions are, I would say, still not -- I mean, not close to being good, but it depends in general, the challenging environment and modestly, I think, is, therefore, the Finnish economy and the Baltic economies as well. We do have the positive -- we are positioned in certain niches where niches where the development is really strong, namely the diverse industry driving a strong development at Milcon, especially, but also a bunch of other businesses as well. For example, machinery our metal industry-related businesses here in Finland. On the other hand, construction sector, it continues to be tough. And for example, the outlook here in Finland, that doesn't seem too promising for this year. Summing that up, we do see a solid foundation for earnings improvement in An important comment goes around the sort of the weighting of our order books. So it is from looking at the last 5- to 6-year history. I think there is a higher-than-normal weighting of the order books towards the second half of this year. These orders relate to primarily technical trade business area businesses, the Putzmeister businesses machinery, MT and other companies as well. When we couple this with the mentioned ERP renewal projects and the costs attached to those, which we've been quoting roughly a number of EUR 0.5 million, related to these projects, this will -- the way we see the world from the company side today is that the earnings improvement is expected to be weighted more toward the end of the year. With regards to priorities, clearly, the focus here, as always, is in developing our existing businesses, continuing to support and allocate resource also from the group side in the highest potential situations and companies where we can generate earnings growth. This is something where we are I think, in a good position with regards to the quality of management in our business and the work done in the recent years to sort of improve the quality of the portfolio. Deleveraging is a priority considering the upcoming refinancing exercise that will be there for therefore, in the short run and thereby when looking at new acquisition targets is always in this situation, important to make sure the company is well positioned toward the refinancing as well. But all in all, I think given this will be the last results or results update from the both of us, and we're pleased with the situation of the company, having been able to bring the firm back to a good situation, I would say. The growth prospects are there. And then I think with Toumas' leadership and the existing team, I think the firm is well positioned to continue creating value for the shareholders in the coming years. With that said, we go to Q&A. There are some questions that have been posted. Thank you for those.

If I go one by one, starting from the top, the first question goes, how about technical trade order book versus year before? I think we both commented that already. there. So a strong improvement, mainly driven -- I mean, I think a general improvement, but the clear uplift there, which we can see, which I would call material relates to the quoted Putzmeister piece as an example, and also the machinery and machinery MP businesses. The second question then goes, is there any one-offs behind the good operational result? No, there are no one-offs. We've been communicating earlier around any adjustments done on earnouts or similar and so forth, but there are -- there are no such things now impacting the result. And there are then three additional questions. Starting first with the business areas. #1 is on the -- it more of a positive side. Technical trade was much better than we expected. Was there any one-offs? Or do you foresee a better market for your subsidiaries going into '26? Well, the one-off piece we already touched upon. So no, the market conditions -- on an aggregate basis, the market conditions are better than a year ago. The variation between the units within Technical Trade business area, is that scale is quite fast. On the other hand, I don't foresee and we don't see the market conditions being, I would say, in any of the businesses worse than a year ago. So I think that tells quite a bit on the trend. The world is what it is. It's a bit of, I guess, uncertainty is the word of the day. But the information we have today, I think we can be quite confident that the direction for that business area is right. Continuing a bit of a similar question with Electronics. Was the weakest within electronics due to tough comparables? Or are the market environment -- is the market environment getting worse? It is definitely the purely the quarter-to-quarter comparison was mainly due to a really strong performance of SSN last year in Q4. And Milcon also posted strong on a reporting basis now a stronger result a year back. But -- but the Milcon's position has improved quite significantly during the year, and we've done a lot of investment in '25, including also Q4 '25 pushed down margins. So those are quarter-to-quarter comparison to two major things impacting the result. The third thing is then the YERS business and the integration phase, which we both mentioned that the profit contribution from that operation now in the result in the entire H2 '25 was quite limited. But we do see that in the course of '26, we are on a positive track with being able to gradually go toward the expectations we had going into the transaction as well. The market is not getting worse or we don't see the size of market getting worse on -- in the electronics trade business area either. There is a -- in our opinion, quite significant operating leverage there when the component trading businesses start to pick up, hopefully, with some support from the market. So that's, I think, something to keep in mind. Now the growth initiatives we've been generating, those are sort of as a result of investments done into businesses, such like Milcon Technologies or YERS as well. And then finally, a forward-looking question. As your financial position strengthens and you become active in acquisitions, again, have you observed any changes in the competitive landscape for acquisition targets in recent years, particularly regarding the activity of serial acquirers in Finland? The -- well, I would frame it this way. The competition has increased in Finland as well in the recent years. it continues to be rather the amount of parties operating in this space is -- it continues to be somewhat limited. We do see in transactions the, suites being there, also some increasing activity from Finnish actors, but there's definitely room to play there and an interesting market to continue working with. But in general, I think it is -- it is getting into a direction a bit and there's more interest towards this space as well, in my opinion provides for Boreo. However, a good market to continue to be active and searching for acquisition targets, which might be totally new platforms or specifically as we're working in the business with proprietary sourcing, looking at potential acquisitions to existing companies, or anything to add there?

No. Agree. The brokered processes, find their way on the table of the swedes more than they did a few years ago due to the model being more known and the advisers, recognizing the buyer candidates more than 2 or 3 years ago. But on the proprietary side, I think it's quite unchanged from our point, number of players. It's quite stable. [ Matters ] come and go. I think the larger swedes, they put their proprietary sourcing efforts into other markets and then some of the smaller swedes are expanding outside of Sweden. So then we said, see them. But I think on net-net, I think the competition level is slightly increasing, but on proprietary side, there's plenty of room.

And then a final question. In addition to Milcon, is SSN already in defense business or could it have growth of possibilities there. Yes, as I said, is present within the defense sector as well, not in the level of materiality compared with Milton in a similar way, then as is the case with some of the other businesses in the portfolio there is support for the demand side there as well. But definitely a topic that is on the radar of the management and the guys working in the business, running the business and from the HQ side as well. And an interesting question and a point of view for also considering potential M&A activities there with SSN. But in general, quite an interesting situation in regards to the defense business. Particularly, of course, with Milcon, which is a really strong position to continue growing as significantly in the future. With that said, I think we're closing it from our side. Thank you for the questions. And thank you from -- on our behalf of all the recent -- recent years. As I said, this will be the last webcast from our side. I really appreciate the active involvement of many of you there on the line as well. We will thank the organization and other stakeholders there directly, but eager to see the new management getting on board and taking the company on a positive trajectory in the future, and we will be making sure the transition goes well and the support in the next coming months, a smooth handover of our duties to the new team members. I think with that said, we closed it for today. I wish you all a good winter and hope to all the best for the future. Thank you.

Thank you.