Boreo

Good morning and a warm welcome to Boreos year 2024 financial review webcast. My name is Karin Erk, I'm the CEO of the firm and together with our CFO Jesse Pettäjä we will recap the happenings of 2024 and more specifically the latest quarter of 2024. Agenda is briefly as follows, so I'll start looking at the entire year painting a bit of the picture on the last five years. And then Jesse will take the review and discuss the Q4 events in a more specific manner. If you have any questions as normal, please use the chat function, which is made available through the platform. Starting off first with some key highlights of 2024. Overall, it was a challenging year for the firm. Our priorities during the year were primarily on working with our existing portfolio of 22 companies. The overall themes and the general themes throughout the year were controlling costs, managing our balance sheet, so focused on optimizing working capital and through that creating cash flow and also continuing to invest where the opportunities for growth continue to be positive, continue to invest in organic growth throughout our portfolio. We are an acquisition driven firm. We have completed in the last five years 17 acquisitions. In 2024 we did not complete any transactions due to priorities to maintain a solid financial standing. So basically looking at the numbers, basically 24 represents with the exception of the half a year result from Delphin Technologies and a nine-month result from an add-on acquisition to Moortekolmia made in 2023. They represent basically organic development of our portfolio. So in 2024, our revenues declined quite drastically, primarily in construction-related businesses, so putschmeister operations in three countries, as well as in some of the Finnish construction-oriented companies. In addition to that, also the development or the demand environment for for some of our primary quite significant share of our firm with industrial exposure on the demand and customer side were tough resulting in overall a 17% decline of sales throughout the year. We managed to secure and defend our profitability through actions taken both on pricing and improving cross margins, but also significantly reducing fixed costs and thereby achieved a 6.8 million euro operational EBIT, 5.1% in relation to sales, which we think is a decent achievement in a tough environment. Clearly the positive part of not only of 24 but also the last two years including 23 was that we've been able to manage our balance sheet well and creating an operating cash flow of over 20 million euro in the last two years and now especially in the last quarter of 24 cash flow our financial standing continues to not be where where we exactly want it to be leverage is too elevated even though it came down from q3 24 but now landing at the end of the year to 2.8 x measured looking at our leverage ratios or net debt divided by operational rolling 12-month EBITDA. This is something we continue to manage in the coming quarters and throughout the year, intend to improve and target to improve our financial standing. Brief look at our strategic targets. As the headline says, we have work to do to reach the levels where we want to be. We do think that we have bottomed now in our profit generation. So we came down in the last couple of years from roughly a level of 10 million euro in operational EBIT down to roughly 7 million euro now in FY24. we do expect the 24 and 25 to be a better year compared with 24 on the back of the investment or the back of the actions we have taken in improving our cost competitiveness, taking cost out we've seen compared to last year. However, if we look at the returns, return on capital employed being at 8x, 8% and leverage being closer to 3x, taking into consideration that we have a 20 million euro hybrid on our balance sheet, leverage is clearly 2. to the position where we would like to be as a firm. Now, showing a couple of slides from the last five years, so developments from 2020 to 2024, and focusing on some of the key developments in the last year. As already mentioned, the big headlines, sales decline, cross-margin decline in terms of absolute euros, but an improvement on cross-margin. from 28% to 30% in 2024 and a decrease of fixed costs roughly by 2 million euro. That basically brought us to the operational EBIT of 6 point. 8 million euro the most positive developments in the portfolio throughout the year I mean were overall seen in within our electronics business area which improved profitability compared to 23 especially signal solutions nordic had a extremely strong second half of the year and was able to go above the expectations we had going in the year, so we developed a positive year after a somewhat over-challenging 2023 with SSN. In the similar way with FMV, our deeper truck mounting business in Sweden, we had a tough 2023, a really strong operational development thereafter throughout the latter part of 23 already but also now throughout 24 so reaching record sales in 24 and then very importantly also being able to reduce working capital and thereby generate in good cash flow in 2024. The challenges we experienced in the portfolio are primarily in the businesses which have been part of the firm for a long period of time. So the YE businesses, our electronic component trading businesses here in Finland, but also in the Baltic countries, machinery, and then our Putschmeister businesses with exposure on the construction market. so overall a decline of over 30 million euro out of these portfolio companies there on the other hand we succeeded rather well in defending profits through cost efficiency measures but also then on the balance sheet side managing working gap well One note I brought to the slide is the last comment there on the slide bottom right corner. I mean, if we look at the profitability levels in our portfolio, the portfolio is a healthy a healthy fund from a profitability point of view. Probably one-third of the companies operate at plus 10% EBIT levels. The other one-third of the businesses around 5-10% EBIT levels. A few closer, I mean between 0-5% and only a few companies on the smaller side generated a loss measured on EBIT terms. So even though overall the picture is not something we're happy with, the portfolio generates a roughly 7% operational EBIT in a tough market like that, which is a good sign of the quality of the portfolio and the improved trend it has also seen throughout the last couple of years. As already mentioned a few times, a very strong operative cash flow, not only in 2024, but also in 2023. So overall, close to 24 million euro operative cash flow in the last two years. Basically, largely driven by the fact that we reached our target, we've been communicating the last 12 to 15 months, I believe. So basically we were able to bring working capital to a level of 25 million euro at year end 24. We do expect in early 2025 some build up of working capital to happen, but going into 2025 we intend to maintain a well-optimized working capital throughout the portfolio. Returns, I mean, basically, I mean, we follow the two key metrics looking at with the return profile. On the group side is return on capital employed and the return on trade working capital metric we use to measure all of our businesses in the group. Looking at, as we'll show later on, the electronics portfolio is operating at a very healthy plus 50% return on trade working capital level, whereas now due to challenges with profitability on the technical trade side, our returns have come down quite significantly in 2024. The balance sheet is managed quite rather properly, but the key focus is clearly in growth creating and aiming to create sales growth and through that then also improving profitability which in turn then will improve the return profile going forward as well. Last two slides, we brought something new, I think, which we haven't looked at before. Now we start to have some years of track record. So we start to be able to also sort of look at somewhat larger trends or longer trends and how we not how we not only have developed in terms of P&L and balance sheet but then also looking at developments and our track record from a capital allocation point of view so basically here on this slide you see a summary of cash outflows or cash inflows start starting from the mid of 2020, which basically we see as a start of the Boreo era. So starting from the Muotikolmia acquisition we did in Q3 2020, we have all together invested around about 50 million euro to acquisitions, including the earnout payments as payments we have made throughout the years. Looking at the uses of cash, CAPEX does not represent too big of a share of our cash outflows given that we are a capital light firm overall and have the requirements to make capital expenditure are quite modest. And then looking at basically the funding side of things, roundabout closer to 40 million euro has been funded with operative cash flow. We've also issued equity as part of transactions. We've also made a personal share issue in 2025. Those combined close to 6 million euro from a financing point of view are the sources of cash and what we've used. and then at the end of 24 we still had a 24 million euro of two hybrid instruments on our balance sheet but now as we speak 30th of February we paid the four million euro the old hybrid back so now in now basically continuing with the 20 million hybrid on our balance sheet. If we look at the desired state and our goal, clearly the primary goal is to be able to fund majority of acquisitions and all other cash outflows with operative cash flow. Why indebtedness has gone up is primarily due to the fact then compared to our own expectations. It is basically the loss of our Russian business and the impacts thereafter which put pressure on our balance sheet from late 2022 onwards. But in any case a good sign of the fact that the portfolio has generated operative cash flow which we as we should have been primarily allocating into acquisitions throughout the last four to five years. And finally, before handing over to Jesse for Q4 review, looking at the acquisition track related to the 50 million roughly invested since Q2 2020. I mean, if you look at in 24 in terms of operational EBIT, the new companies you see being acquired since 2020 generated roughly somewhat a bit over 5 million euro of operational EBIT in year 2024. So nowadays already especially now the more cyclical part of our business being portfolio basically the acquisitions we made have supported our profit generations and the companies have supported our profit generation very significantly looking at the return side of side of things in average looking at three-year average returns we have generated a return of 15 percent for the 50 million euro invested throughout the last years not quite where we expect it to be so the multiple or the other way of looking at it the return expectation has been at 20%. Now we are at 15%. However, once market conditions improve and the development actions we're taking in the companies, they start to kick in over time. We do expect that once we look at this sort of graphs in some years down the line, we have a good chance of reaching those initial initial investment targets we have set at the point of acquisitions. So overall a rather decent track of acquiring companies, being able to operate them, transform from an entrepreneurial world to continuing in an entrepreneurial world but in a different ownership setup and also then creating confidence of the fact that the business model works and we are able to allocate capital with good expected returns for investments. So that's it from my side and then I hand over to Jesse for Q4 review please. Yes thank you.

So looking at Q4 a bit more closely. In general the quarter went quite as we expected. After several weaker quarters we returned to growth so net sales grew by roughly 6% from the comparison period. Gross margin levels were a bit lower in Q4 with some higher volume deliveries, but EBIT was at 2.1 million euros, which was on the level of Q4 23. This was in addition to the sales growth supported by our cost measures, which we took earlier in the year, which in Q4, realized at roughly 800,000 euros in lower fixed costs compared to the previous year. In addition to decent profit generation, we also managed to generate strong operational cash flows of roughly 7 million euros. This was supported by our working capital management. We achieved our targets for Inventory levels and bringing working capital down to year end, we were at 25.5 million euros. And this increased profitability and then strong cash flows also decreased the leverage from the previous quarter. But as Kari mentioned earlier, the level is still elevated at 2.8 times. If we then look at the trading outlook and order books, order books decreased slightly from from the previous quarter, but looking at the comparison period a year ago, we are at significantly higher levels going into 2025. We had some sizable orders postponed to 2025, which we expect will materialize in the first half of the year as well. And if we look closer on the business area levels, electronics, they had a very strong end of the year. Their sales growth was 31% compared to the previous quarter in 2023 on the comparable quarter. This was largely due to SSN. As Kari mentioned, they had significant investments from their largest customer materializing. And then Milkon had a very strong year, both full year compared to 2023 and then quarter, quarter four. also achieved net sales growth compared to the year 23. In general, Milkon, we expect this will continue going into 25 as well with strong demand on the defense industry side. Margins, as said, they were a bit lower on the group level and this comes largely through the electronic side of the business where SSN had the high volume deliveries in the last quarter. The business area managed to reach 8.5% in EBIT margins, which was a very strong level. EBIT itself was 1.7 million euros in euro terms, which represented a growth of almost 50% from the comparison period. And this shows in the rolling 12-month EBIT figures then in the bottom right corner. the profitability has increased on a rolling basis, and then combined with successful working capital management, the return on trade working capital has increased quite meaningfully from 43% to roughly 52% in Q4. Then if we look at businesses outside of SSN and Milkon, the performance was a bit varied in Q4. So why e-businesses, for example, Finland exceeded forecasts in the last quarter, but had a challenging year in total in a difficult environment. Then especially the Baltic countries continued facing difficult market conditions and continued with decreasing sales compared to the comparison periods. There we don't see any immediate changes in the operating environment. but the companies have done a good job of managing working capital in this environment. Due to these operating challenges and then a broader review of operations, we in Tallinn, or our Estonian operations, we closed our consumer business and did a reorganization of YI International in Estonia, and this resulted in decreased need for space for the company to operate in, and we have initiated a sales process of the company on premises in Tallinn, which we expect will materialize in the coming months. Then for the other businesses, still varied, no Retron underperforming in products meeting expectations. Delfin, our health technology company, had a challenging quarter, but the company continued its Product platform reform, which was initiated last year, they've done work with renewing their global distribution network, continued developing their selected future strategic paths, and in general, have a quite positive outlook going forward with the opportunities with the business. But as a whole, electronics performed well for both the Q4 and full year. Then, on the other hand, if we look at technical trade, we had a modest performance in the last quarter. Challenging operating environment continued. Sales declined by roughly 11% compared to Q423. As Kari mentioned, for the full year as well, this was largely due to the machinery businesses and Pulsmeister businesses. here profitability for the business area reached 4.5 percent this was this was reflected also in the quarter to quarter results which was 900 000 for q4 for the total this was roughly 45 percent decrease from the comparison period so a really tough quarter If you look at the R12 rolling EBIT figures, these have been declining this year and reflected in the return on trade working capital, which was at 24% at year end, even though the business area here as well did a very good job with working capital management and bringing inventories down to our targeted levels. On a more business unit specific side the business woodsmeister business is suffering still in finland from a tough market this was both in q4 and during the whole year we expect the demand outlook to remain uncertain going forward as well sweden fell a bit below expectations in q4 but had a solid year all in all They defended profitability very well through their strong aftermarket sales. And then they have developed a strong order book for 2025, part of which we have communicated earlier large orders from a customer. In other businesses, F&B was mentioned in Kari's overview. They had a very successful end of the year as well. high sales in the quarter and all-time high sales for the full year 24. They have managed to get their ERP implementation done, which has presented challenges previously for the operations. They've done a successful reduction of inventory levels and developed a solid order book into 25 in addition to already reaching record higher sales in 24. Then for the other businesses, going quickly through the largest business unit in the business area, Machinery Power, performed decently in Q4. Machinery also completed the separation of the metal machining business into its own unit, Machinery MT, which had a challenging quarter at the year end. This was as opposed to Pronius, which is in the welding product business they have also had a challenging environment but performed well in the last quarter and has been defending profitability during the year very well also due to their strong market position on other businesses machinery construction for example performed up to expectations but the environment is very tough multi-columbia construction side Same thing, they had a tough Q4 and demand outlook still continues to be quite moderate, but Mootti Colomio did a good job doing a full year defending profitability as well, both on the business sales mix side, defending margins and then cost measures during the year. The remaining businesses varied performance, filtered performing up to expectations and taking growth investments, finding good opportunities to grow the business going forward. JNATIC having a tough year due to demand from the largest customer, but also working on expanding the business and finding good opportunities. ASKP, similar. Q4 was a bit tougher than the full year in whole, but they have also successfully won one year business to expand going into 2025. But in general, looking at the two business areas, electronics has been strong this year and technical trade has had a tougher operating environment, largely due to business and then machinery and the construction related stuff. If we then jump over and take a look at our financial position, our debt facilities, to be more accurate, we in December agreed to extend our credit facilities by one year, the maturity from 2026 to 2027, and simultaneously agreed to postpone loan repayments of roughly 2.5 million euros from 2025 to 2027. So now at the year end, 24, we had liquidity of 24 and a half million euros, of which 9.7 was cash, and the remainder was unused short-term credit facilities. Going into 2025, we have scheduled debt repayment of 2.5 million euros. And then, as Kari mentioned, we notified we have redeemed 4 million euros of the old hybrid on the 10th of February, which was originally issued in 2022. So now we then have our maturity leading towards 2027 where we have at that point 60 million left of our term loan our acquisition facility of which 6.5 million is of use today then we have a reset date of the new hybrid and then there's a revolving credit facility up there showing us 4 million euros which is unused as of today so if you look at the whole facilities which we have 73 million of at the year and 54 million was in use which includes 24 million euros of the hybrids 4 million which now was redeemed Then moving onwards into our outlook going forward order books as mentioned Coming into 2025, we are at significantly higher levels than in the previous year, so decent start to the new year. The cost measures we have taken during the year will support operational improvement on an annual basis. We have a lower fixed cost by roughly 2 million euros, and then we have continued positive criteria and the companies have been developing these even during the year where our focus has been to focus on profitability and working capital management so to summarize the message is the same as in Q3 in the short term we continue executing on our back to growth plan we have successfully managed the cost programs we have manage the working capital release, reorganizations are completed. We continue investing and developing our existing companies where we have opportunities to grow with projects that meet our criteria. And then where we see that companies do not meet our criteria in the short or midterm, we continue to evaluate if we do reorganizations. which we have communicated that we are willing to do if the case be so. That's it for my part for Q4.

Okay, thank you. Thank you, Jesse. I think there are some questions. There's a new platform in use. I think not only in our case, but we try and cope with it. looking at the questions here not sure if you if you see them but we'll go them through one by one um first question is you've done reads like this you've done some opex investments including recruitments can you give some indication of the net impact from the cost cut actions an additional spending when thinking of 2025 compared to the year-end 2024 situation. Yes, it is correct that recruitments have been taken. Partially already at the end of 2024, but now going into 2025 as well. some examples including for example Delphin Technologies during Q4 investments there into organization same thing with machineries auxiliary power business where the demand outlook on the back of data center industry developments and and actions we've taken to prepare for growth. It is partially now going into 2025, there is some pickup and of course in a year like 24 the level of compensation bonuses or similar have also adjusted downward so going into 2025 there will be provisions on the balance sheet going forward expecting for or somewhat different performance as compared to 24. So there is some pickup, definitely not back to the levels where we were looking at fixed costs in total, but but let's say increase of fixed costs overall is something we expect to happen in 2025 if then at the other hand the market would not support us to the extent that we expect at this stage then of course there's always an ability to flex downwards as well So that broadly, I believe, answers the question. The second question is that do you foresee the significantly better development of SSN continuing this year? What does their order book look like? Overall, the outlook is positive. especially in poland and in you know in finnish you know in in the finnish market uh the outlook is is rather uh positive uh somewhat more challenging looking at at the us market uh and uh and and sweden but overall as ssn group uh rather positive um we do we do see that there is a chance to continue operating at close to levels of where we were in 2024, so which is closer to levels of 22 as well and 21, which was strong as opposed to a tougher 23 we had in between. But looking at phasing and so forth, Q1, there was a certain backlog that was brought in successfully in Q4 24, taking something out from Q1 now 25. So we do expect as in 24 as well that the performance of SSN will gradually improve during the year. Then there's the third question of what kind of working capital build up do we expect in the near future? I mean, I think the In general, I would say that if we would remain close to the current activity levels where the business is running from a net sales point of view, we're looking at a couple of million euro trade working capital swings in the business. Of course, some timings of larger deliveries and machines can deviate and increase the swings as well. The 25 million euro mark is roughly, I mean, we don't see significant opportunities with this portfolio to squeeze much more without jeopardizing our ability to serve our customers well, but basically I will see in the beginning of the year some buildup as we communicate it to be happening. I think it will obviously grow a bit