Boreo

A good and sunny morning from the Boreo headquarter and welcome to this session where myself Karin Erk and our CFO Ako Lumpunen will discuss the developments of Boreo during the second half of 2023. Agenda as before in our webcast so I'll recap both strategic and financial highlights of the second quarter. And then Aku will discuss the business performance group and business area company specific more in detail. And then we will take at the end of the session questions that you may have asked during the webcast. So please use the chat function made available for you. So starting off, Q2 was for us a decent quarter, no cage of a quarter I would describe. Financial performance-wise, profitability was on a moderate level, 2.4 million euro of operational EBIT at the level of last year, 5.6%. Profitability margin is, I would call it, a decent and moderate performance from our current portfolio. At the same time, the cash generation, I'm very pleased with that to see that the earnings and the return on capital mindset is rooting in the firm better and better quarter by quarter. and in the quarter now a strong roughly forming euro operative cash flow, 165% for this period. If we look at the performance during the first half of the year, we had a strong Q1 when it comes to earnings growth, roughly 90% growth compared to Last year, cash generation, on the other hand, was not that strong. So if you look at H1 overall, we've grown results on a good level, roughly close to 30%. And also the operative cash conversion, roughly about 100% has been on a still level. So overall, H1 has been a good start for the year. During the quarter, we also continued to execute our M&A program and announced to acquire a company called Delphin Technologies in June 23, closed on the side of Q3, so not visible yet in our numbers, but happy to welcome yet another great entrepreneurial business to the Boreo group. If we look at the trending performance, financial-wise, a bit more in detail. Profitability-wise, we continue trending in the right direction, rolling 12-month basis, 26% earnings growth in the period ending June 23. This is a good result and demonstrates also the performance during Q1. Of course, looking at it from a longer-term lens, starting from 3.9 million in 2021, being now at closer to 10 million euro overall, tells that we've gone to the right direction as the firm and look forward to seeing and expect to see in the coming quarter as well. Returns on capital are on a modest level at the moment. Our target 15% minimum return on capital employed. We are not there yet. We're working hard to steer the firm towards that direction. Now, return on capital employed remains quite stable compared to the previous quarter. negatively impacted slightly by the operational profitability on the other and supported through the strong gas generation we saw in the quarter. Leverage in line with the trend you've seen in the last one to two years, so we continue to steer the ship carefully maintaining a solid financial position, leverage of 2.4 times net debt to operational EBITDA, also at the levels where we towards the future like to be, rather downwards than upwards. Then if we look at a bit more specifically, a couple of key highlights from my side on the business area performance and company specific performance. So during Q1, we introduced for the first time the metric that we use in the steering of the whole group and all the companies as part of the part of the family, so the return on trade working capital. We are currently now at 29% on a rolling 12-month basis. And as a reminder, roughly with this sort of a portfolio, we should be around 40% in order for us to be at the expected levels of 15% return on capital employed at group level. Electronics and technical trade business areas has been trending rather positively in the last quarter with regards to capital efficiency, whereas we've had our difficulties with the heavy machines business area. Now during Q1 and the first half of the year in electronics business area, the figures although they look quite okay on a business area level, were negatively impacted by especially the challenges we've had at Signal Solutions Nordic related to the investment holidays or, let's say, pushing forward investments on the side of our main customers. On the other hand, for example, our Baltics businesses have been operating extremely well and developing to the right direction already the last three years, but especially now during the last year, and in particular, the profitability and performance development has been great in our Latvian business. On the technical trade side of things, all the businesses as part of the portfolio, so machinery, Pronius, Motti Colomio, J-Matic and Filterit, delivered a good profitability during the quarter. On the other hand, at Machinery, we have had our, let's say, temporary challenges with regards to working capital, too much working capital tied into the business, and we're working hard to change that situation in the second half of the year. Within the heavy machines business area then, a great achievement, how we were able to complete the exit. We completed from Sunny operations in Finland and Sweden. Also happy to see the Putschmeister business, which has been under cost and cost pressure in the last, cost pressure and also delivery challenges during the last two years delivered stable 5% operating result. Then on the other hand at F&B, the other business we've had our difficulties with in the first half. We've been undergoing investments into improving our production processes, the production flow, the manufacturing of timber trucks and other equipment in the firm as well as implemented a new ERP during Q2. So these had a negative impact on on the business area results, also the group results consequently. So negative operating profitability during the quarter, which we expect to see in the coming quarter. Then M&As and acquisitions are an integral part of our business model. As a reminder, we've deployed since Q3 2020 roughly 43 million euro to acquisitions, now not including the Delphin acquisition that was completed now in early July. However, 16 acquisitions, good companies, which all contribute to the gradual improvement of the resiliency of the firm, also the financial profile of the company. And this company, we've been able to acquire roughly at five times EBITDA on a consolidated basis, now looking at it backwards. As mentioned in the very beginning, one of the highlights of the quarter was the acquisition of Delphin Technologies, a company based in Kuopio in Finland, a health technology business that produces hand-held skin and edema measurement instruments. So a new type of a business for us, which we found and were happy to welcome to the group as a result of our own proprietary sourcing work that we started in 22. An interesting company that serves customers both on the medical side of things, but also in the luxury industry. As you can see from the numbers, really strong and also long-standing, strong profitability, high margins, also high returns on capital. And on the back of the positioning and also the validation that the company has in place for clinical use both in the US and in the EU, I'm very happy and eager to continue and starting to work with the team to create an interesting growth path towards the future. So the next six months or the second half of the year will be the time to do some strategic decisions as to the strategic direction of the firm and at the same time maintaining a steady financial performance as we've seen in the last years. Then finally, from my side, sort of a brief outlook towards the future, not guidance as we align with the way we do things, but nevertheless talking a bit more on where our focus in the firm internally is and how we think about the world, even that the, let's say, business environment is somewhat of a tougher one compared to the last years. Number one, we remain confident that our earnings target, 15% earnings growth per annum in the minimum, is a target that we can achieve in the coming years. We have seen during Q2, as seen from many companies and industries, not only in Finland, but globally during Q2, some signs of of a weakening and more challenging environment. However, our order books in the companies continue to be rather healthy. And given the work that we have done both organically with the companies that we've already owned for a longer period of time, but also through acquisitions, we are quite happy with the portfolio of companies we have and are confident in their ability to continue defending margins and making money in this type of environment as well. This will be demonstrated, and we can also see in the numbers, profitability-wise, cross-margin-wise, that how our businesses have developed in the last quarters. Secondly, capital efficiency is a core area where we work with the organization, not only, I mean, we're not there to to optimize our working gap levels on an unsustainable basis in the short term. However, we work with our MDs and our key people and the whole organization to root the mindset of the importance of prioritizing and balancing between making a good operating result, but also taking into account the cost through the balance sheet that is attached to making that result. So as of Q2 2023, the operatively working gap that is tied to our business is around about 31 million euros, so excluding Delphin figures, which are rather low. And I believe that we are, I mean, the normal sustainable level where our companies can operate in the longer run is closer to the mark of 25 million euro. And we are working to get towards towards this target in the coming quarters. Naturally, the new companies joining the firm, the absolute figures will continue to hopefully arise, but nevertheless, relatively speaking, we should be able to achieve and release some capital out of the working gap in the short term as well. Financial position, we want to maintain steady in these environments. We have during Q2 also increased buffers, financial buffers in the firm by negotiating an 8 million euro increase to our existing credit facilities, which are there to support the companies and the operative performance should there be a need to do that. That's a good thing. And secondly, also, we remain constantly disciplined to safeguard the position, safeguard the financial standing of the firm at any given time. Then last, but not least, so a bit of a longer-term outlook. We did try to communicate through our social media channels that we were glad to finalize in June version 1.0 of our operating manual called the Boreo book. This book is, I believe, quite an important milestone in the development of the firm as, let's say, after three years of Figuring out the concept, learning, making mistakes, making improvements, I believe we have arrived with this book and its content to a simple set of guidelines which will serve as the guidance for building the firm for a long period of time. So very happy to have been able to work with that, with a larger amount of our key employees. And I'm finishing off that first set of the document We do feel that we want to communicate more and more on the long-term value creation drivers on how we build the firm, how we work with the firm to make it a successful one in the long run. And for this purpose, we have a plan to introduce a concept what we call Poreo Series during Q3, in which we will aim to, through a series of letters in the coming quarters and years, to to open up and facilitate the discussion around what we believe really matters in developing the firm and giving stakeholders externally and internally better understanding on how we intend to build the company in the long run. So more to come on that front and overall very happy with the steps we are taking in steering the ship and with regards to business model we are taking making big steps towards the future. That was my presentation. I hand over to Aku for more financial operation. All right. Thanks, Kari.

As a tradition, let's continue now to do the finance sales. A bit of a recap. I can change the slides here. It happens. No, sorry about that. So let's start from the rolling 12-month top line performance. As shown here, the growth still continued on a yearly basis, 22% increase compared to Q2 last year, despite of the fact that we had now in Q2 a bit slow growth. Water, especially in some operative companies, but on the other hand, the newly acquired new businesses contributed well to the quarterly sales figures. And operational EBIT side, in line with the last quarters, rolling 12-month figure, but profitability-wise, as seen here, very stable throughout the previous quarters, 26% improvement against last year, second quarter. Then still second quarter figures, moderate sales growth, 5%. I will come back once again. on the reasons more in the next slides, and then also from the operational EBIT side in line with the second quarter last year, as well as the profitability very much level on the same level. Then this picture we haven't had for a while. I think this well describes our cost efficiency. in the long term, kind of trend-wise. Again, here rolling 12-month figures. On the left, we have direct cost ratio, which we can see that has been very stable throughout the past quarters. We have had quite turbulent and also difficult quarters in the past from the market side, different kind of inflatory pressures, etc. But this shows that we have been able to quite well also level out the impacts and then move the cost pressures towards our pricing, for example. And then on the right, indirect cost ratio as well. Lowering curve, which means that the indirect costs have been quite well also in control. Now a bit up in the last quarter here, mainly because of now the exit from sunny operations, but also somewhat impacted by the newly acquired companies and the different cost profiles there. But overall, throughout the past two years' time here, very solid development. Then, from the organic and inorganic sales development side, this quarter now was a bit extraordinary from the from the previous quarters that we have shown so mainly the or purely the growth came from the from the mnas now from filter it and ematic acquisitions especially as well as lamox during the end of last year and and the beginning of this year but then on the other hand the old businesses meaning organic growth was was negative due to the the earlier mentioned reasons. And from the operational EBIT side, same here. So the contribution positive came from the acquisition side. And then on the other hand, from the organic businesses, a bit negative development now quarter on quarter. Then, moving on still to the business areas, electronics first here. 6.4% operational EBIT margin was a decent one. It could have been also better, mainly due to the fact that SSN had a very difficult second quarter. But on the other hand, the other Finnish operations here performed stable compared to the previous quarters, and also the order book and outlook has remained very stable in the businesses. In Baltic operations, especially in Latvia, very strong quarter supporting very well the performance of the business area. And then finally, but definitely not the last, is the capital efficiency. 50% return on trade working capital, which is a very good improvement, supported by the EBIT performance as well as the capital actions. Technical trade, again, solid performance, twofold, I would say. In machinery, power business, first of all, Strong quarter compared to the previous year's same time. And also still order book is good for the coming quarters. Then construction market is challenging at the moment. There are machineries, construction equipment businesses is mostly at the moment suffering and definitely soft outlook there. But then on the other hand, in Montecolmio side, which is more from the renovation construction market side, still very, very good performance and also active market as we speak. Metal machines, Bronius and machineries, metal machine businesses, well, Bronius, good performance, although being a bit below last year, very strong quarter, and steel metal machines is a bit softer with the outlook also. And as said, G-Matic and Filteric, very good two acquisitions supporting very well now the performance of the business area. And return on trade working capital, slightly decreasing trend here, but we have very much taken the focus now, especially in the machinery side, on the release of working capital in the latter part of the year, and that we are following very closely. Heavy machines, definitely the highlight of the quarter was the exit of Sunny Operations, which was closed now, according to the expectations in the end of Q1 also. So that, especially the capital release side of roughly 1.8 million euro was definitely the positive side supporting the cash flow and capital efficiency, although that being still on a very negative trend and we are definitely not satisfied on that one. But then on the other hand, Butchmeister Business, solid performance with 5.1% operational EBIT in the quarter. So stable there. And business area, operational EBIT hit by the 0.2 million euro, one of course now during the quarter. because of the exit of Sunny Businesses. And F&B performance below expectations now in Q2, mainly due to the investments in our new ERP system, which definitely has not been a success until now, but we believe that those challenges are behind and we will benefit from the new ERP operational system going forward, bringing more efficiency also. And then finally, other operations, ESKP business, again, with 1.2 million euro sales and 10% operational profitability, so very stable throughout the past quarters. Then return on capital employed development. As we have noted in the past quarters, especially that the hybrid bond issue in the beginning of 22 has impacted on the trend very much. And now during the past quarters, that impact has been leveling out already. We definitely expected that Q2 Return on capital employed would be slightly higher, but that is on an 11.2% level, mainly because of the performance in Q2. And return on equity, likewise, very much impacted by the hybrid issue, and now a bit pressed in Q2. mainly because of the increase in interest expenses and that impacting on the net profit. As Kari mentioned, net debt to operational EBITDA, very stable on a 2.4 times level, and cash conversion very positive, rolling 12-month figures here, 96%, and that peak now in Q2 was mainly mainly impacted by the release of cash in Sunny's businesses in Finland and Sweden. And then finally, earnings per share, slightly below last year level, as mentioned, as the operational EBIT was very stable compared to Q2 last year, the slightly negative impact now comes from the increased interest expenses especially. and very pleased with the gas flow performance in Q2, 3.9% operational gas flow. And that, of course, will be the heavy focus also going forward. So that's all from my side, and now we go to Q&A. Thank you, Aku.

I've been glancing through the questions here. I did publish them also here, so you can see what the other people there on the line have asked. So categorizing these questions a bit. Let's start with heavy machines business area related questions. First of all, There is a question on the Putsmeister business development. Do you expect this positive development to continue forward despite economic uncertainties? I will comment the situation. I think we've been able to maintain the the majority of the leading market position in all the three countries where we operate in. So we have a strong over 50% market share in all the three countries. And it's been our strategic priority to make sure that this is the case during a downturn and also during a coming better time or let's say an improved environment. We have, I mean, looking at the short-term outlook in Sweden of the three countries, we have the steadiest, the longest order book for 23 mainly, and expect to, because of also now somewhat easening delivery times in this business, expect to be able to deliver a good result based on the backlog that is there. The same thing in Finland, also a decent of an order book, not as full as in Sweden, but nevertheless on a normal level, also reflecting the customer base in Finland and Sweden. So the difference that in Sweden we have to a great extent, large corporate nature customers compared to Finland where more entrepreneurial business is. So overall, Estonia is okay. Numbers are rather small for this year, but nevertheless, good strategic steps can be taken. They can, for example, also introduce smaller mortar machines from Putzmeister to the Estonian market. So, I mean, yes, of course, investment uncertainties among our customers have increased. That is a clear thing. However, we continue to see activity and 23 looks quite okay. The question is then more on 24 and beyond and how that will look like with active sales support development also after companies, of course, provides protection. So, confidence on the long-term ability definitely also supported by the green transformation ongoing in that business and supported by Pulsmeister hybrid machines, which are market leading in the business. Secondly, there are a few questions on FMB. One is where do you currently stand with the operative performance and the implementation of the ERP? And when do we expect it to improve? I think there was an other one also. So do we expect to return to organic earnings growth already in Q3? And we are, I mean, the ERP has been implemented already and that was done. The live grow live happened, I believe it was in April. Thereafter, some challenges to get processes running, but we are on a good track. H1 was negative operating result-wise. We do expect a significantly positive second half of the year, of which signs are there already from the latest trading. We do have a good order book there, and the customer, we are fully booked in a way, both at FFB as well as at Lakmestana. So the situation from a customer demand side is stable. This is about production. I mean, not only ERP, but investments in production processes, standardization of the businesses, processes from drawings to all the way to production flow and efficiency. So, I mean, everyone who's dealt with this type of issues knows that there are uncertain remains to be seen, but as of today, we believe we're on a good track and that should already yield a positive result in second half of this year. That, I believe, was HMBA, if not heavy machines, business area-related questions. There are a few, we continued electronics, then there are mainly questions related to signal solutions. I'll scroll on a bit. Two questions. When do we expect the topline to return? In the first place, we did already expect, as we communicated before, that this would be of less temporary nature these challenges that we have. We already do see improved performance in particular in SSN in Finland on the back of the order backlog. We have there and support at least, let's say a stable performance. I mean, SSN is not producing red figures. It's on a consolidated SSN group level delivering still positive occasion of results. However, we have certain signs that we are about to improve. When that will happen, we feel that the communication in the bulletin also kind of in the coming quarters is the situation where we are. So continuously monitoring the situation, working with our customers, I mean the main customer that we have there, but also expanding the business we have. to Germany as well. Significant steps, openings of new places, of a new location in Poland, for example, during Q2. So systematic good steps for longer-term development. Yes, an uncertainty for the short-term performance is there. It remains to be seen in the coming quarters when that gradual improvement will flow through. But I would comment those questions like that. Then group related financial questions to Akum mainly. Your group costs decreased year on year. Do you expect the increasing trend this year in group costs or have you achieved sufficient level?