Boreo

Good morning from the Boreo headquarter in Vantaa and welcome to our Q3 2022 webcast. My name is Karin Erk, I'm the CEO of Boreo and our CFO Akko Rumpunen is here today with me to go through the highlights of Q3 2022. Agenda is as normal in our webcast, so I will be recapping first quickly the financial highlights as well as strategic highlights of the quarter. Thereafter, Aku will discuss more in depth about the financials and the performance of our businesses. And followed up with the presentations, we will take any questions you may have during the during the presentation, so please use the Q&A function that has been made available in the link there. Getting started, as the headline said, Q3 was a successful quarter for us in terms of financial performance. It was also an important quarter for us as we updated our strategy and introduced our new strategic financial targets. In terms of numbers, we recorded 50% net sales growth, as well as the 38% operational EBIT growth. Net sales growth was driven both by acquisitions, so transactions we have completed in particular during Q1 and Q2 this year. But also importantly, the underlying growth in our businesses was strong and contributed also significantly to the growth we experienced during the quarter. Operational performance and in terms of profitability, operational EBIT at the record level of 3 million euros, close to 7% operational or EBIT margin, is a good result and achievement from the businesses that we currently have, and we're very pleased with the performance we were able to introduce during the quarter. The financial standing of the company remains stable, so net debt to operational EBIT died 2.5x, in the middle of our strategic target level 2 to 3x range. And then those of you who have followed us during the last months, and we looked into further detail on how our strategic new financial targets look like, return on capital employed, our new strategic target, where we aim to go to above a level of 15%, We're currently at 10.8, as expected, and are targeting and directing our doings going forward to reach the level that we have set for the business. If we look at, Ako will discuss the performance of the business in more detail, but in a broad context, profitability was driven during the quarter by our electronics, our technical trade, business areas as well as ESKP, our logistics business that is reported under other operations. The profitability of heavy machines, our heavy machines business area is not where we accept it to be. And there we are working hard with the team to improve our profitability going forward. Here in this slide, you see the rolling 12-month numbers. Electronics recorded during the quarter close to an 8% EBIT margin. Technical trade was above 12%, and heavy machines been at around 2%. If we look at the business on where we stand, and surely everyone's interested about the outlook going forward in this challenging and uncertain environment. We continue to be rather confident on the ability of our businesses to perform in the short term. So the signals we hear and see in our businesses for the short term are broadly said rather stable. As already reflected in the new strategic financial targets, our focus is on a longer term on earnings generation and efficient use of capital, especially now in the next quarter and in the short term, we do see a need to reduce the amount of capital tied into the business. So as you have heard us before, communicating that we have been securing our ability to serve our customers through increasing our inventory levels and tying capital into the business. Definitely there we have some optimization to do, and we're focused on doing that in the next quarter. As you already see from the figures, we have two or let's say two of the three business areas that are currently performing well. One is not where we like it to be. On the other hand, this also is one of the strengths we see in our business model, the decentralized operating structure, as well as the diversification of the portfolio. This is a strength during challenging times. Some of the businesses will support the others and the group performance, depending on quarters. And also, I would like to note that with regards to the way we operate and the way we are structured, in case the operating environment changes and drastic changes happen, we are of course able to adapt quickly if needed. But overall, continuing to see positive positive developments in the companies, and we are focusing on making sure that we come out strong, even challenging times as well. Then turning more into the strategic side of things, I brought up here to the presentation a couple of slides from our strategy update, some of the points I wanted to kind of reconfirm or discuss about on what were the key highlights of our strategy update, and then I'll be briefly talking about M&A developments as well, which continue to be in the core of what we do. So first of all, with regards to the update of the strategy, looking back at the three last years, we've gone through a significant transformation. from electronics distribution businesses only towards a business that can be called a serial acquirer, more of a diversified serial acquirer. The financial performance has been strong. We've recorded significant growth of earnings and sales during the last years. These results, I mean, we can be proud about the results, considering that we have taken a hit from the exit of our Russian operations that we completed a couple of months back. And also considering that a lot of the time last year was spent on the CV merger that never went through. So something of which we can be proud about. Now going forward, we will expect to continue on the growth journey. We aim to continue the transformation of the financial profile of the company. So clearly through acquisitions, but also through development actions of our existing businesses to transform the financial profile towards higher operating margins and stronger businesses by nature. And as you will hear in the next slide as well, we continue to develop our operating structure, the way we work in order to make sure that we reach the targets that we have set for the future. On this slide, I wanted to bring, let's say, the updated illustration of our business model into this presentation. These points pretty much reflect the changes also that we implemented on the strategy update side. So first of all, the two upper points up there on the upper end of the slide and on the right-hand side, We crystallized and are in the process of crystallizing our profile as an owner. So we want to be an owner of good and great entrepreneurial companies that generate strong profits, but also generate a lot of cash flow. Then importantly, our profile as an owner when it comes to the way we develop our businesses or how we support our businesses. This is an important point from a practical point of view of managing the company. We have put more an emphasis on the supportive and coaching side of things so that as a majority of the operational decisions are done in the operational companies that we have the role of the mother company Boreo and the divisions is to be a supportive owner and continue to develop the businesses that we have and developing also our personnel. And when it comes to then more of, let's say, the M&A side of things or creating organic growth, we have already introduced quite a lot of additional discipline into the way we look at investing capital or deploying capital into organic growth initiatives. or also acquiring new companies. So introducing thresholds when it comes to what type of financial metrics we need to see and want to see from our businesses, as well as looking at the business profile, personal aspects and ESG aspects in more detail. So this is, I believe, quite a good illustration and an explanation of what the whole business model is about. and we continue to execute and make the machine even more better in the next years. The new strategic targets can be classified under the topic of, let's say, a more clear focus on earnings growth and return on capital. So the new strategic targets are the ones you see on the slide. We look to generate a minimum of 15% operational EBIT growth over the long term and grow with an attractive return profile, which we measure through return on capital employed ROCE. So we believe that compared to the earlier targets, which were more, which were net sales and operational or EBIT growth and the same leverage target is better reflect on what we believe to create a shareholder value in the long term. The dividend policy, we also slightly adjusted to account for the, let's say, developed capital allocation thinking You have seen us yesterday releasing and announcing that we will distribute the second part of our dividend for year 21. But going forward, dividend decisions, the point of taking into consideration capital allocation priorities is something that we wanted to introduce into our dividend policy as well. Then to give you a bit of a further, let's say, or insight more into what we are about to do in the next months with regards to development of the company and in more detail. So three headlines here. First of all, we continue to put focus and resources in developing our operating model and governance structures overall. So this is one of the key initiatives for us over the next quarters. The objective here is to further and further crystallize and clarify the way we operate in reality, not only the way that we communicate on our strategy to our stakeholders and how do we intend to reach our strategic targets, but how in reality we run the company, how do we expect our key leaders and broader group of people to operate both from a financial but also from an ethical point of view. So these are clearly items which we seem to be of essence in order to create a long-term successful business and to make it clear on what are the roles and responsibilities in the group as a whole. So this is something where we are currently working with also with regards to ESG topics, where we currently have out our stakeholder surveys. surveys, which will be one of the key topics also for us in the coming years. Secondly, and as a continuation of setting new strategic financial targets, we are working with our business and have introduced new operational or financial KPIs to our businesses, in addition to talking about the P&L, profit and loss statement items and sales and margins and profitability, we have taken a step towards starting to more and more talk about cash flow, return on working capital, the way we manage our working capital. And in order to ensure that from every single business in our group and the way they are steered also will eventually contribute to us reaching the targets that we have set. So something very important on the back of this to enable this, we have earlier during the year also invested into new group consolidation systems that enable us to increase the visibility that we have on the businesses and enable importantly also benchmarking and sharing best practices when it comes to between our businesses. Then last but not least, on the side of development of operations, you have heard us talking about in the last month about the Boreo game plan concept. We have already rolled out the so-called strategic roadmap work during the year in roughly half of the businesses that we have. We're most advanced on the side of our electronics business area, and also started and completed part of the plans in our technical trade business, as well as in other operations. A heavy machines business area is there as a next. business area where we put further focus on. I believe this is something quite important for the company as a whole, as in many of our businesses, this is the first time when such type of longer-term, mid-term roadmaps are set, and these are also very important in order to make sure and enable the autonomous operations as part of the group as well. So work that we expect to yield on a longer term basis results from a financial point of view, but also ensure that our companies continue to go to the direction that we expect them to go as well. Then as a last slide, that was more on the strategic side of things. When it comes to the development side of things, what we do with the business and the group as a whole and where our focus will be in the coming months. With regards to M&A, the third quarter continued to be an active quarter. We completed one small acquisition. Our Swedish subsidiary, Floorby Nya B-verkstad acquired a company called Lakmestan that is a company specialized in painting and surface treatment of heavy vehicles to a supplier, already an existing supplier to FMB, which we expect on this transaction, we expect to yield some operational synergies over the longer term and secure also the important painting capabilities for FMB. So this deal was announced during the quarter, completed in early Q4. Then we completed the Russian exit. Russian exit meaning for us the exit from our electronics distribution businesses that were there as part of the former YE for close to 30 years. This was a full exit from our point of view. The exit has gone as planned. We still have some proceeds that we are expecting to arrive from this transaction, but so far everything has gone according to our expectations as well. Then turning a bit to the future, we've done over the last months a lot of work when it comes to developing our M&A capabilities, introducing processes, pushing down the M&A capability, especially to our business area organizations, as well as to partly our companies. And positively, we have started this work to yield more and more interesting acquisition opportunities, which we are creating directly from inside the business. And we're currently working with a number of interesting transactions that complement our existing business areas and also complement and contribute to the ambition that we have to create new subsectors under the business area, as we explained during the capital markets day as well. So positive trend when it comes to M&A pipeline development. Also something that I expect, I'm pretty confident on our ability to continue executing transactions. Of course, during the challenging, uncertain times, one needs to be rather careful on valuation of the businesses and looking at where the businesses are with regards to profitability. But nevertheless, on the M&A side, things look rather well and interesting things hopefully to come in the coming months. And last, I would note out that, of course, also, when it comes to the inbound that we see from a deal sourcing point of view, we feel that the Boreo brand is slowly but surely getting more recognized. We're becoming more known to the market and also continue to see and continue to get more and more deal flow out from the M&A communities as well. So this was the update from my side. My side, I would then turn the page to Aku, and Aku will continue with financials.

Aku, please. Thank you, Kari. Let's start with recapping the group level quarterly net sales and operational EBIT performance. As said, very strong growth continued during the quarter, 50% in net sales and operational EBIT grew by 30%. 8%, and as seen from this graph, also the profitability has developed well during the past quarters. Then visualizing a bit more the trend, how the business has been performing with the rolling 12-month figures. Firstly, on the left, net sales, also they're above 50% growth compared to to the situation one year ago. And our new strategic financial target, growth of operational EBIT, 15% on an annual level, so 40% rolling 12-month growth in operational EBIT exceeded that level clearly in the quarter. Then a bit components from where the quarterly growth came from. And pretty much same situation as in the past quarters, roughly 50-50 from M&A side and from organic side. And from the inorganic growth, signals and illusions Nordic that we acquired in June this year impacted very much on the growth as well as InfraDex. during this year, but also F&B that was acquired in September last year. So also two months inorganic impact from that company. Then moving on to business areas. First, electronics, once again, adjusted for continued operations, so excluding the Russian figures totally. very good growth quarter on quarter, 64% to 17.3 million euro from 10.5. And that was supported basically by all units, as said, very much came from the inorganic side, especially from SSN and InfraDex, but also the organic performance during Finnish operations was solid and strong, improved performance overall in the units. Also, the order book has still remained on a very good level, and at the moment we don't see any changes in the outlook there. And just to mention also from Q2, that our subsidiary Milkon is also benefiting on the increased demand among the defense industry customers. And Baltic operations, despite of very high uncertainty during the past half year, still performing stably. and above our expectations that we had in the beginning of the year. And from the development side, comment that the integration of SSN has been performing well and proceeded well during the year. Then technical trade side. As shown in the graph, also there good growth of 20% quarter on quarter with very good profitability level, despite of the fact that especially in metal machining business, we have had challenges during the year because of the uncertain environment. But in the power business of machinery, very good growth. result again in the quarter, supported by the generator business, which has been benefiting from the energy price environment and demand, especially in the auxiliary power business side. But also from our OEM customers, the demand has been very good level during the the past months. In construction business, Multicolmio and machineries, construction equipment business, also solid and stable performance. There are uncertainties in the construction industry overall in Finland, but we see still reasonable outlook for the near future. And Pro News acquired in the first half of the year has performed strongly and definitely offsetting some of the challenges in the business area and supported our performance very well during the year. And then heavy machines, very strong growth over almost doubled quarter on quarter compared to to last year Q3. However, as Kari mentioned, the performance and the profitability has not been in the satisfactory level. And we are currently working on the performance improvement actions throughout the businesses. Well, in Putschmeister business, better than expected performance during the quarter. However, still, the delivery times are long, and there are uncertainties in the supply chain, as has been the case during the past year or so. Sunny business definitely not performing with our expectations, with profitability and diluting the business area. So especially in Finland and Sweden, this has been the case. But in Estonia, performance has been according to expectations. And from F&B side, good performance. But here also, the supply chain challenges, especially in the chassis deliveries and supplies. limiting the delivery capacity at the moment. And finally, as mentioned, after the review period, F&B acquired Lackmeister, which then will expand the offering overall of F&B towards customers. And finally, our other operations, where we have our logistic businesses, ESKP and Westerbakka Transport, as seen from the bars, very stable, good performance over the quarter and on a good EBIT margin level also. And there we have a stable outlook also, despite of the of the inflatory environment, especially from the fuel prices. Then moving back to the group level figures, our new strategic financial target return on capital employed stood at 10.8% level. that has been now very much impacted on the hybrid issue in the first quarter, pushing up the capital employed levels. As seen here, €7 million increase from the previous quarter. So from that side, the return on capital employed staying in the past quarter level is good performance. And then on the other hand, on the return on equity side, improvement from the previous quarter driven by the good net profit development. But here also, as we can see from the bars, the absolute amount of equity has been increasing now now heavily during the past quarter, especially due to the hybrid bond issue in February this year. Then our third strategic financial target, the leverage target of a range between two to three. And again, we landed on the middle range on 2.5, by X level, so good and solid performance. And then on the equity ratio side, slight improvement from the past, from the previous quarter, driven by the good profitability and good performance in the quarter. Then, Finally, on the left, earnings per share. Cray bars are operational earnings per share, improvement of nearly 20% compared to last year's Q3, despite of the fact that now we have, during this year, also accounted the hybrid interest impact on the EPS side. And then, very important KPI for us, cash flow. As mentioned, we are now more and more focusing on the cash flow and the capital allocation and the efficiency of capital. 0.8 million euro operative cash flow during the month, diluted by the working capital increase in the month. However, has to be noted that there is 1.6 million euro decrease now during the quarter from the inventory level. But that will be on a heavy focus going forward. I think that was all from my side and then we can move on to Q&A side.

Thank you, Akku. Thank you, Akku. Bear with us a second. We will try and do our best to get the techniques to work. We have a good amount of questions. Thank you for those. There are a few easy ones I take first, and then we go into further detail. So first of all, a question, how does the acquisition pipeline look like now? I think I already commented that during my presentation, so it looks good, it looks strong. What I like about it is also that it comprises of good quality companies that fit to, first of all, business areas, but also there's a good amount of entrepreneurs who feel to be enthusiastic on what we do and motivated to join the group. And when it comes to the business areas, I would comment that majority of the deals are currently at the at the electronics and technical trade business area sites, and also in other operations where we expect to continue growing via acquisitions. Whereas in the heavy machine side, our focus is rather currently on focusing and getting us back on track with regards to underlying business and profitability. Also there we have a good amount of new opportunities, but rather in the shorter term look to complement our technical trade, electronics and other operations through M&A. Then I think there were a couple of other quicker ones with regards to M&A, there was a question that what do you, could you please clarify the term workshop extension used as part of the technical trade business area commentary. So that refers to the GT motor acquisition that we did in May this year. Made this year, coupled with the acquisition, we extended the workshop that we have here at our headquarters that is for machinery power and construction business. So that workshop extension has been completed and the GT motor business has been transferred into this physical location. So that is the That is the reason for there. So we expect that to contribute positively into the offering of our machinery power business unit and increase capabilities as we communicate it when we execute the transaction. Then we have a bunch of questions with regards to business performance. If we start from from below. First of all, on electronic business areas, could you open factors behind the strong growth of electronic business area?