Boreo

Good morning and welcome to listen to the key highlights of Poreo PLC's Q1 2022. My name is Karin Erkka, I'm the CEO of the company and together here with me today is our CFO Akku Rumpunen with whom we'll go through the key highlights and events of Q1 of the year. In terms of agenda, I'll be first discussing and presenting the key highlights of Q1. Aku will then continue in further detail to our figures and numbers and also the performance of our businesses. And after the presentations, we'll be addressing any questions that you may have in the course of the webcast and the event. So you will be able to post any questions using the Q&A function that has been made available through the link where you registered. Starting first on the highlights of Q1. First of all, financial performance was in line with our expectations. We continued on the growth path both in terms of our top line as well as profitability. We improved in a timely manner our financial position during the quarter, so implemented and executed a hybrid bond in connection also refinancing and putting together credit facilities agreements which support the continued growth story of the company. We progressed well also in terms of our strategy execution, so we completed three acquisitions in the course of the quarter and also took significant steps in developing the operating model going forward. Then, of course, the Ukrainian crisis and the events taking place currently in Ukraine shocked us greatly. At the same time, it is already clear that the operating environment as a whole is shadowed by the impacts of the crisis. And we have already disclosed and communicated In March 2022, we have initiated the preparations and evaluations about exiting our component distribution business in Russia, where the work still continues. So these are the key highlights. I'll be discussing these in more detail in the coming slides. First of all, in terms of figures, as already said, net sales grew by 30% compared to Q1 2021. Also, operational EBIT 22% versus the same quarter a year ago. and also the leverage as a net debt to operational EBITDA that developed positively or by describing the strengthening of our financial position through the financing arrangements which I already mentioned. From these figures, I think the key point is that, of course, Q1 with the business portfolio that we have today is impacted due to seasonality, not the best quarter that we anticipate to see in the course of the year. However, the trend that you see basically in the graphs starting from Q1 2020 show a steady and a gradual increase both of our top line also profitability and also during the same time we've been able to maintain a solid financial position which we measure through the leverage ratio presented there. So overall, very happy about the overall performance of the firm, continued steady growth, which we also expect to continue going forward. In terms of our business area, so Aku will be discussing this in more detail, but if we look at the first quarter, first of all electronics business area and technical trade business area performed well and slightly above our expectations as well. The financial result of our heavy machines business area was somewhat below our expectations, mainly due to the delays of deliveries, especially on the Putzmeister business side to next quarters, which affected then the performance and the result made in Q1. However, if you look at the graphs also here by business areas, you see a steady growth curve going forward. The slide also and the curves also reflect quite well the seasonality of our businesses. So electronic component business being much more stable from quarter to another. whereas technical trade and heavy machines business area where we have companies which deliver bigger machines equipment to our customers also the quarter to quarter the deviations are somewhat more bigger. However, the big and the key message and the most important message being that I think we are on a continuous good growth path and the businesses perform and operationally develop into the right direction. Then touching briefly on the geopolitical situation or the impacts of the geopolitical situation, the Ukrainian crisis to our businesses. As I already mentioned, we have initiated measures to exit the component distribution business in Russia, including a divestiture. divestiture process. It is a complex process from a perspective of regulation and changing regulation and evolving regulation as well. And we will be communicating more on that front once the time is right. If you look at how the crisis impacts our companies, First of all, it's clear that the most significant impact can be seen on our Russian businesses that gradually will be impacted more and more of the crisis at hand. Then because of our diversified business portfolio and the whole decentralized business model that we are running, we can see both positive as well as negative impacts on our companies. First, if we touch upon the positive side of things, what we have already seen taking place in the last weeks and months is that there is clearly a positive demand that can be seen on the companies which are exposed to, for example, the defense industry or which are exposed to the broader trend of security of supply. So Milkkön as one of our companies in the electronics business area clearly benefit or we expect to be benefiting out of the situation as well as our machinery or power business unit within machinery where we have auxiliary power business where we see increased demand for our products and services that we provide for our customers. Then if we look into the side of, let's say, less positive impacts of the situation at hand, we see that those companies which are exposed to or where the demand is driven by, let's say, broader investment projects or investment-driven businesses, for example, our machine tool operations in Tampere at Machinery as well as Pronius, There we see that the uncertainty that has increased significantly in the world is making our customers more reluctant and careful on their investment decisions. And there the demand outlook is less good as compared to some of the other businesses we have. Also clear from a geographical standpoint that we have electronic component distribution businesses in the Baltic countries. So in Lithuania and Latvia in particular, we have already seen some impacts on the demand of our companies there. All in all, if you look at this, we are confident on our business's ability to perform well in a longer-term perspective, whereas it's clear that these developments, also the inflation that is there, put pressure on the short-term financial performance of the company. Then if we turn more towards, let's say, our strategy or the big picture on how we pursued and how we progressed during the quarter in terms of executing our strategy, starting from the M&A side of things, so we continued successfully to execute execute our acquisition program. So we completed and closed on 1st of March three acquisitions on the same day. So Epronius, Infradex and Västerbakka Transport, three companies, which were all add-on acquisitions to our existing business areas and businesses. Fronius First as a distributor of welding machines and equipment of the Austrian Fronius Group, a company with strong market position in the Finnish market, add-on to our technical trade business area. Then Infradex, a distributor of thermal imaging cameras and other measuring devices and solutions, where the key supplier is Teledyne FLIR. a company that was added and well complements the electronics businesses that we have. And then lastly, Västerbakka Transport, a slightly different type of an add-on, more driven by operational synergies. That was an add-on to one of our existing companies that we report in our other operations, so ESKP. That complements the logistics offering of ESKP. All this deal, I think, if you look at the valuation levels based on which we have completed the transactions, they reflect quite well that the valuation levels, which are rather decent, I think cases are a good showcase of the attractiveness of the business model towards entrepreneurs and their willingness to join the group and continue creating value as part of a larger group. Then also I wanted to bring up here the latest acquisition that we announced now this week. So a couple of days ago we signed an SBA together with the owners of a company called Signal Solutions Nordic. So a group that can be described as a one-stop shop for fiber optics and EMC needs. So basically a company working in the test and measurement field, providing services to their customers. Also an add-on to our electronics business area, a company that will operate as an independent business within the electronics BA that we have. This is an interesting transaction, it's a sizeable company. Looking at the group, SSN group financials, 17 million euro in net sales in total. 13 employees in four different countries, so Finland, Poland, USA, and also Sweden. An interesting transaction also from an internationalization perspective of the group also going forward. So this transaction we expect to be closed on 1st of June and then consolidated in our group figures from June 22 onwards. Then at the same time during the quarter, we took significant steps in improving and continuously improving our compounder business model. So M&A, they are also already mentioned that we completed three acquisitions. With regards to our operational excellence strategy, we completed the steps that we expected to be taken. So first of all, we completed the first Boreo strategy concept pilots at Yleis Electroniikka in Finland, continue to roll out those. strategy concepts in our other companies from Q2 onwards. We also put effort on clarifying, crystallizing the way that we want to work with cost efficiency and cost improvements within the firm. We'll be providing from Q2 onwards for our companies also the possibility to join let's say a pool of contracts through a supplier that can lead to and we expect it to lead also to cost improvements in our independent companies. And then with regards to our people and culture strategy, very importantly, we launched in March 2022 Boreo Academy and its leadership program. That is an integral part of the academy concept that we have put in place. That then is followed in Q2 by the launch of launch of the first talent programme throughout the history of the firm, where we want to put more and more focus on developing our key employees, also key talent, and providing opportunities to grow and prosper within the group. And last but not least, I would like to point out that we do continuous work around improving and refining our operating model. So I think the so-called Boreo 2.0 project that we put in place in Q three last year, I think we've taken significant steps, mainly from a perspective of crystallizing it to ourselves and our companies, what is the kind of true meaning of the concept of decentralization and how to run a compounder type of a business as we wish to be, and also putting the kind of concept of entrepreneurship and our independent companies into the core. So significant amount of initiatives that we have completed which we expect to be yielding results and enabling the scalable continued growth of the firm going forward. So those were the key highlights, so I would then like to turn the page towards the financials, and Aku, please.

Thank you, Kari, and good morning also on my behalf. Starting from the key figures table here, and I will not go through all All the figures here, Kari already pointed out some highlights from the quarter, but addressing the fact in the bottom of the page, some adjustments done to accounting principles during the first quarter. First is the elimination of purchase price allocations from our operational EBIT calculation. We see that this better reflects the operational business and operational profitability of our companies, and the impact of that was a positive €300,000 for the first quarters. And the past quarters have been adjusted accordingly. And secondly, we issued hybrid bond during the first quarter of the year and the hybrid bond interest has been accrued now and that impact is also calculated to earnings per share amounting to seven euro cents for the quarter. Then moving on to the bridge, sales bridge from the first quarter as usual. our growth came from two sources, from acquisitive growth and from organic growth. And again, the kind of components are relatively equal, which is very good, roughly 50% from the both sources. Foreign exchange rate did not have material impact on the first quarter net sales. Then moving on to business areas, Kari already reflected some of the key points from our businesses, but firstly electronics, strong growth and good performance, 20% growth in the first quarter compared to the comparison period last year. supported especially by all Finnish operations, YE, Norretron, Milkkon, and also now Infradex, as consolidated from the March onwards. So, despite of the still continuing allocation situation and prolonged delivery times in the worldwide supply chain, the performance was very good, and we also have good good number of order book at the moment. In the Baltic operations, very strong growth during the quarter, mainly supported by the transferred sales and transferred deliveries from the end of the last year. But then, as mentioned, also the Ukrainian crisis starts to impact and is seen already in the business and in the operating environment and that most likely will continue also in the coming months. Same goes with the Ruslan operations, which share from our Q1 figure still were 6 million in the sales and 0.8 million euro from the operational EBIT. Technical trade as well, strong growth year on year, roughly 20% supported by organic growth, especially coming from the machineries power business, but also the demand in the construction equipment has stayed and remained good and solid. profitability clearly ahead of last year, and that also mainly comes from the good performance in machinery. However, here also, as Kari mentioned earlier, also the geopolitical situation has been showing some signs of uncertainty growing within the customers' decision-making and investment decisions, and that most likely also will somewhat affect on the coming months' performance. However, in certain areas of the business, we have seen increasing demand, for example, in the machineries auxiliary power business, which is supported somewhat by the focus to supply of security. Then heavy machines, very strong growth, roughly 60% growth from the previous year, first quarter, and that is also supported heavily by the acquisitions, but also from the organic growth, especially from the Budsmeister business in Estonia, which performance was excellent during the first quarter. As we can see from the graph, profitability is definitely not where we expect it and where we aim it to be. But as we have seen from the previous quarters, as well as sales, also the operational EBIT fluctuates quite strongly within this business segment. And that comes from the sales mix, quarterly mix, and also also from the fact that deliveries have been transferred and moving from quarters to the future quarters. However, here also rising inflation is affecting on the profitability and based on the current estimates that will also impact going forward. And then finally, other operations, ESKP, still very stable, solid performance with 1 million euro sales roughly on the first quarter, and then the operational EBIT of 12%, which is very, very good level. And Westerbacca, are now coming to the group from the beginning of March and will be consolidated then to this section going forward. Then some pictures from our financial position or balance sheet, net debt development as well as equity ratio. Very good performance and change now from the end of the year and that relates to the issued hybrid bond 20 million during the first quarter. Cash flow and earnings per share. Firstly, EPS from the left. I already mentioned that the quarterly bars are somewhat now affected on the adjustments, but also here in this picture, also the comparison periods, previous quarters have been adjusted accordingly. Operational EPS slightly grew from last year. If you look at the reported EPS, on the other hand, then, comparison period last year was heavily impacted by the non-recurring gain from our office sale in Olarinluoma Expo, impacting roughly 30 euro cents to Q1 2021 reported EPS. And then cash flow, solid operational cash flow now in the first quarter, clearly better than the previous years. And during the quarter, networking capital was very much intact, stable, which then supported the operational cash flow. And as in the previous quarters, We reported now three acquisitions in the beginning of the year impacting to this blue bar invested cash flow reflecting the acquisitions. And then some trends from our cost development. In the left, we have rolling 12-month direct cost ratio, where we can see that over the time from Q3 2020 until Q1 2022, cross-margin has been relatively stable over time, despite of the fact that that not only now in Q1, but also in the previous quarters, we have had quite extraordinary operating environment. And on the other hand, indirect cost ratio also rolling 12 months, reflecting well the kind of strategic target also, which is the scalability of the business and is positively seen as a trend from the indirect cost side. And then finally, very important arrangements completed during the first quarter. Already mentioned these, but here once again. So we completed 20 million euro hybrid bond issue during the first quarter, and also refinancing of our existing term loan facilities, 35 million euro. but on top of that raised new acquisition facility of 10 million euro for the acquisition purposes and also increased the existing amount of Revolvin credit facility from 5 to 10 million euro. And on the right in the picture on the bars, we can see the maturity. So this means that we have now a very good situation, and this supports our strategy execution going forward. Also in the bottom right corner, the structure is now much more balanced between different facility items compared to the previous times. So I think that was the financial part, and now it's time for Q&A. Thank you. Yes, thank you, Aku.

Maybe as a final word from my side to Q1 before going to questions, I think that you can see from the presentation, it's a very eventful quarter, new acquisitions, new companies coming to the firm and development initiatives being taken. very importantly we were able to complete the financing arrangements also in light of the uncertainty that is there for especially for the Russian operations and so forth so very happy that we were able to to put the company into good shape, continue to grow the company also in the areas where we believe and when we are confident of the ability to grow the company profitably going forward. And I think that even the times are challenging and uncertain, I think the business model is well suited for a situation like this and the key focus is to to continue to maintain a good level of operational profitability in the companies, but also to, in a determined way, to continue to allocate capital into new acquisitions and into new growth initiatives. So I think we are well positioned for continuing the positive development we have experienced in the last two years. But then going to the questions, first of all, thank you for... I have some questions here on the chat. Some of them are in English and a few in Finnish, so I think we respect the language of the one who has asked and take those in the language we have got them. First of all, I think maybe a couple of short business-related questions. So the first question here is, heavy machines business area related to heavy machine business area are delays there due to global component allocation or related to increased uncertainty of customers. So first of all the delays in deliveries relate mainly to the putschmeister business and secondly slightly also to the excavators of the sunny business that we have. These are because of the component shortage that we are experiencing. So it's mainly on the Bootsmeister side we're talking about the delays of deliveries in chassis that are there. So Mercedes, Volvo and Scania basically for the Finnish, Swedish and Estonian market. So we have strong order books in those businesses ranging or reaching all the way to 23 as well. But basically the difficulty in this situation is about the delivery schedules. On the Sani, so the excavator side, we are in a good position with regards to machines being delivered from Sani to our operating countries. But at the same time, then it's more about the attachment where there's, let's say, more of a challenging situation, I think, with all players in the industry currently. So those are the key reasons behind that, not that much related to uncertainty of the customer side. Secondly, there is a question on our machinery business and the auxiliary power business basically. So machinery focuses on security of power supply increased in Finland due to geopolitical situation. Power seems to be already quite strong, but can you say more on expectations there? For example, we have heard from news that some 300 shops will be investing the security of supply of power machines. Yes as I think we commented it also already in the release and also Akko and myself we were both commenting on that. We do see that let's say businesses which are exposed to the trend or which provide services that relate to security of supply there is an increasing demand on those because of the situation and the world we live in at the moment. Of course, those will take some time before they actually realize into sales and profitability. But yes, we do see there a positive demand. On the other hand it's good to note that when we look at our machinery power business as a whole there we also have significant OEM customers for instance on the Cummins and Kubota side and then there those are more let's say investment and OEMs demand driven businesses so a bit of a different trend also there within the whole power power business, but overall it is a strong business and we expect it to be strong also in the future. Then there are two questions about the signal solutions Nordic transaction that we announced on Tuesday morning this week. The first one is about the consolidation of the Group Financial. So Signal Solutions Poland's business was not yet consolidated. Would you like to share more about the timing of its consolidation in the future? I think it's a good point to note. So as I think it was presented in the slide as well, which I showed during the presentation, The revenue that we are consolidating to the group is roughly 13 million euros based on 21 figures. However, the Polish business, which is owned on a 50-50 basis together with the local entrepreneur in Poland, is not consolidated to the figures, so will be not consolidated to group figures. The impact of those would be also increasing. It's a bit more than 4 million in sales and a bit more than a million million in EBITDA. And with regards to the timing of its consolidation, this is something where we will be working together with the local shareholder there and together with the SSN management to sooner or later try and find a way to consolidate the Polish business also to the group. And then there was another question on signal solution. So first of all, the question goes like this. The SSN has a geological reach in the US and in Poland. On the other hand, Yleis Electronica has a geological reach in the Baltics. Can they benefit from each other's sales network and how big synergy do you see in this? Do sellers of signal solutions continue in the company after the deal? First of all, yes, the sellers of Signal Solutions continue in the company after the deal. Toni Aaltonen will be the managing director of SSN. Lasse Kvossmanen also continues to support the business and also our electronics business area as a whole going forward. We've done the deal, as you have seen us, doing transactions mainly I mean, not acknowledging and taking into account the synergies. If you look at the valuation and if you look at the deal as a whole, we see that as a good transaction on a standalone basis. In this case, we do see significant potential for organic growth internationally together with the firm. But at the same time, it is correct to say that we, of course, do see possibilities of of let's say cross-selling synergies with the other electronics business area companies. What the amount and volume and those will be, that will be something that we define more in detail in the future once we get on going and working with the management after closing the transaction and also then working together with the other companies to reach out the potential. Definitely, I think that as I mentioned already in the presentation, it's quite interesting also from an international growth perspective to bring a company with this type of a footprint into the group. Then I turn into, thank you for those questions, I turn into Finnish then. Elikkä meillä on täällä yksi kysymys, joka kuuluu seuraavasti, elikkä, mitä tarkoitetaan tällä osavuosikatsauskommentilla strategisista tavoitteista Ukrainan kriisitilanteesta aiheutuvasta merkittävästä epävarmuudesta johtuen yhtiöarvio parhaillaan, onko kriisillä vaikutuksia strategisiin taloudellisiin tavoitteisiin? Haluatko Aku vaikka kommentoida?