Boreo (Helsinki:BOREO) Q2 2025 Earnings Call

0:01 Good morning from Vantaa from the Boreo headquarter and welcome to this webcast session where myself Karin Erk and our CFO Jesse Pettäjä will discuss the second quarter 25 highlights of Boreo PLC. Agenda is as normal. I will discuss the key financial and strategic highlights of the second quarter and the first half of the year. And then Jesse will dig into further numbers and business area specific performance. If you have any questions, please use the Q&A tool made available.

0:47 Starting off with a kind of key commentary on the second quarter, first from a financial point of view. We continue to grow now for a third consecutive quarter, so strong organic sales growth of 19%, of which 17% was organic. Gross margins remain stable now our businesses and in the recent quarters we've been trading at around 30% gross margin levels and on the operational EBIT sides of profitability was somewhat below last year 2.2 million euro in absolute terms in the second quarter.

1:38 below due to somewhat higher fixed cost which we expect to be partially periodic for this quarter and also the fact that last year's result was boosted by more significant earn out provision releases. So operationally our businesses performed better than a year ago but the accounting related adjustments impacted the quarter to quarter comparison. Our leverage as a financial standing improved quite significantly during the quarter or from to the end of the quarter, mainly as a result of the issuance of a convertible hybrid bond, 10 million euro to Norwegian insurance company Protector for Sikring.

2:28 So leverage came down from roughly 3x to 2.3x at the end of so toward the end of the quarter. Cash flow operationally was negative in Q2. Our sales grew especially toward the end of the quarter, quite significantly leading to rising receivables, which we then expect to come back in the somewhat slower summer months, so expecting positive cash flow then in Q3 and toward the end of 25. Looking ahead, order books remained quite stable even though we grew on a net sales basis quite significantly, so quite good order intake during the quarter.

3:20 So that provides us some certainty and some visibility for trading in the coming months. However, I think a longer term outlook is a bit more shadowed depending on what's going on overall in the world at the moment and a bit more unclarity toward next year and then end of the year, but coming months and order book support quite decent performance performance in the coming months and then the quarter. On the strategic side, very pleased to see a couple of activities, the issuance of the convertible hybrid that I already mentioned, a bit more of that in the coming slides, and also the fact that we returned to acquisition track again since mid-2023.

4:15 So closed during the quarter one acquisition, an acquisition of SpetsElektrodi AS in Estonia, a welding product distributor in the Estonian market. And then now in Q3, we have closed 1st of August, the acquisition of Elfa Distrilec activities here in Finland and in the Baltics. So really happy of these strategic developments. With regards to our long-term strategic targets, we still are not there where we would like us to be. I think operationally performance-wise, we are trending in the right direction. Three consecutive quarters of sales growth start to point us to the right direction.

5:06 We do expect profits to improve in the coming quarters as well. expecting the bottoming of our result having happened in year 2024. Returns continue to be rather mediocre at around 8-9% on a return on capital employed basis, but definitely room for significant improvement, mainly while we succeed in bringing profits back and revenue back to historical levels. development on the positive when it comes to leverage positive development now so a significant downward trend or a downward movement in our leverage ratio so now at 2.3 x considering the impact of the convertible issued now at the end of Q2 in addition to I would say rather positive development of results I think the key positive developments from the firm is basically the fact that the work started one and a half to two years ago in number one, protecting the profitability of the company, reducing working capital, generating cash flow and with an objective returning back to growth.

6:38 Now we start to see the results of those actions and we've seen a significant amount of strategic priorities met during the first half of 2025. So they announced two acquisitions which I already mentioned, the consecutive three quarters of organic sales growth and then also the issue of the hybrid bond which provides us firepower for completing acquisitions in the future and a lot of other actions and development actions we've taken in the portfolio. So, for example, the sale of sale of the real estate in Tallinn in Q1 2025, the separation of our largest business machinery into two companies in Q4 2024 and a lot of other development actions in the businesses which we do expect to yield positive results going forward. So I think the company is in a much better shape than it was one and a half to two years ago as a result of the actions taken not only in the group, but in our businesses and in the portfolio as well.

7:59 And on the back of that, we're well positioned to improve the performance and to remain on a positive trend as we've now seen the last two to three quarters. On the acquisitions, briefly noting, so as I mentioned in the beginning, during Q2 we closed the acquisition of SpetsElektrodi, a company focused in the distribution of premium welding machine and automation products, a business that has been built on the back of the Fronius relationship. since, I would say, the 1990s. So we do own, already since 22, the sole distributor of Fronius products in the Finnish market.

8:50 So this was an expansion of the relationship with Fronius to the Estonian market as well. So it's a strong, good, reputable business, in a good market position for decades operating at roughly 10% operating margins and employing 12 employees in the country. So the transaction was closed now in May 25 and onboarding is ongoing as we speak. A bit of a larger transaction which we announced on the 1st of April was the acquisition of Elfa Distrilec sales activities in Finland and the Baltics.

9:39 So this was an acquisition done, transaction signed with the long-term partner of ours RS Group from the UK. This transaction was now closed on the 1st of august so basically last uh last friday and uh and then we have welcomed a couple of days ago um 10 new colleagues to to uh to the markets and to our facilities so happy to see the team growing uh growing and uh and and a business with a lot of growth prospects going forward also being integrated into into the business so overall too very important that since the delphin technologies acquisition in mid-23. We were now able to return back to the acquisition track.

10:27 We are an acquisitive firm. We should be acquiring companies on a frequent basis. And given now the issues of the hybrid as well, we are well positioned to continue doing that in the future as well. With regards to the hybrid or the convertible hybrid that we issued, I wanted to bring a few points. First of all, the instrument is, as the name says, a convertible hybrid bond. It's an equity classified instrument under IFRS. It carries 10 million paper carrying a 4% fixed interest rate for the next four years.

11:12 providing an option for the holder of the bonds or protector to convert the 10 million euro to shares in Boreo at the price of 19 euro per share. We also do have a right to redeem the bond after year four uh we do expect this to be we see this as an equity instrument even though it has a interest rate component to it and and perceive this as as a really important sign from a very reputable investor uh believing in the and who has been following the company for a long time believing in the long-term value creation potential of oreo as well So happy to have completed the transaction, the rationale behind with the transaction primarily being this providing support for us to be able to, continue doing what we're supposed to do so acquiring companies and developing the existing ones and supporting investments into the existing portfolio it does it did of course improve our financial position quite significantly leading to lower financing cost because the issue and the classification under the equity classification basically

12:42 pushes down our senior debt financing terms and also lowers the amount of use of leverage and other debt facilities at the point of issuance of that hybrid. So overall really strong compelling instrument and the transaction which we believe to be the long term as well and finally taking a bit of a look at what we intend to do and sort of not financial guidance but more of a focus priority focus guidance to toward the coming months so on the back of the now completed actions that our focus will of course as always be in the continuous development of our portfolios or the existing companies that we own for the development of those businesses at the same time also considering as we've said if there are some companies in the portfolio which do not meet the demand or the criteria of ownership considering potential divestitures of such companies this is ongoing work and this is playbook. Number two, given

14:13 the increased firepower and the stable position from a financing point of view, we look forward to exploring new opportunities and potentially executing then on additional acquisition in the coming quarters. With regards to trading of the underlying portfolio and existing portfolio. As I said in the beginning, the order books remain stable from the end of Q1 and are on a level which is higher compared to a year ago. So they do support a decent performance in the coming months. What happens at the end of the toward next year however looking at the demand trends there's some positive movements on the on the industry side construction overall from our point of view remains quite modest and unstable not showing short-term let's say movements upwards but overall the significant part of the portfolio which is related to industrial activities see there's a bit more at least the way we see them.

15:31 But let's see how things go and we will of course acting in case of significant movements up or downwards quickly to make sure that profitability remains on a decent level. So quite happy being able to continue on the path that basically executing the strategy set in place currently not absolute on an absolute basis where we should be but we have already started to trend in the right direction and I think we will be able to do so in the coming in the short term future as well with that said I will hand over to Jesse for further review of figures yes so looking at the big picture

16:23 On the financial side, as mentioned, we had a growth of 19% on a quarter-to-quarter basis, of which 17% was organic and two percentage points coming from the SpetsElektrodi acquisition in the technical trade business area. The market conditions remain quite moderate still throughout the quarter. but looking at the rolling 12-month figures for the group we can see that we have turned the corner and the positive trend is becoming visible in the in the sales figures there for the business areas electronics bit of a mixed performance within the business area but both Milkon and SSM continue with good results technical trade a good quarter as well and especially the Swedish Putzmeister business continued its strong performance.

17:26 Then if we look at the gross margin and profitability side of things, gross margins were at roughly 31%, remaining quite stable at previous quarters. We have had significant improvement in the previous years due to our both acquisition profile and then some product portfolio decisions made in the business units. But despite this, the sales mix varies a bit from quarter to quarter. And now, especially through the partial recovery of sizable machine deliveries, the margins have been diluted somewhat from what they have been. On the EBIT side, relative profitability decreased slightly from the comparison period.

18:14 This was both due to the aforementioned sales mix, then a higher fixed cost base in Q2, which was a result of both recruitments, some OPEX investments in some companies, management bonuses, and then looking at the comparison period, the 24 Q2 had some burnout provisions released in a more significant matter than what we had this year. and looking at the cash flow profile the rolling 12-month cash flow as we define it cash flow prior to debt service and M&A capex was at the healthy 9.4 million euros and cash conversion at 95 percent the reported operative net cash flow was a half a million euros negative in the quarter this was mainly due to increase in trade working capitals of roughly 3.5 million euros excluding the special electrode acquisition.

19:24 And the increase in trade working capital was a result of strong revenue growth at the end of the quarter, which increased the level of receivables significantly. But all in all, we expect to take down the working capital level in H2 and the working capital management has been on a solid level so far. Then looking at the return side of things, return on trade working capital decreased a bit to 26%. This was both due to the slightly diluted margins, but then especially the increased receivables at the end of Q2.

20:09 all in all the working capital management has been on good levels and although we see improvement potential there as well our main focus for improving the returns is on the profitability side where we see a clear potential to improve in our current portfolio and driving up the returns when looking at business areas electronics had a sales growth of 17% on a quarter to quarter basis. Operational EBIT was below last year's quarter at roughly 800,000 euros with EBIT margins decreasing to 5.6%.

20:54 This was partly due to sales mix, so lower margins in the quarter. And then there's been some recruitment and OPEX investments in some of the companies. Working capital management has been been on a solid level in the business area and the rolling development in the bottom right corner at 4.5 million euros has been improving during 2025. The market conditions for the business area overall remain quite weak. The uncertainty in the electronics component business has led to some customers postponing investments and affecting the demand environment. Order books grew slightly from Q1 though, and they are on a good level going forward.

21:42 And especially Milkon and SSM have continued their strong performance. The acquisition side, Kari already discussed. So we signed the Alphadisk Relax SBA in April and their completion was now in 1st of August Technical trade had a good quarter with sales growth of 20% quarter to quarter basis. Operational EBIT grew to 1.8 million euros. The EBIT margin declined slightly to 7.1%. This was due to larger machine deliveries, which diluted margins somewhat.

22:33 The return on trade working capital also decreased slightly to 24%. mainly due to the increase in receivables at the end of the quarter. But the rolling 12-month EBIT continued its positive trend since the end of 2024 and reached 4.9 million euros now in Q2. Performance-wise, the Pulsmeister Sweden business continued its positive trend, strong quarter there. Order books declined slightly from Q1, mainly due to delivery overall remain at a good level going forward and then on the m&a side we had the special electrode acquisition company joining the group in in may with the onboarding progressing and proceeding well so far then finally a word on our improved financial position so as as kari discussed the Convertible hybrid bond of 10 million euros was issued at the end of the quarter, which due to its equity classification, it's strengthened our balance sheet significantly and has taken our existing financing costs down. We are currently in a position where we have 59 million euros of

24:05 total facilities in use, including the convertible hybrid bond out of 76 million euros We have a strong liquidity position and now our balance sheet is in a position where we are capable of pursuing further acquisitions once again. On the debt maturity structure on the left hand side of the page, a majority of our debts have a maturity date in 2027. This shows the total facilities maturing then, so 13 million of RCF. which is currently unused completely then we have 12 million of our acquisition facility of which 8 million is in use currently and then our 13 and a half million in our term loans our 20 million euro hybrid bond also has a reset date in q127 meaning that unless it's redeemed there's a step up in interest rates and then finally the convertible hybrid bond, which was now issued as a restate in 2030, unless converted to equity prior to that or redeemed by Boreo in four years time.

25:31 That's it from the financial side of things.

25:36 Okay, very good. Thank you. Thank you, yes, and we continue with questions. I published all of the questions here, so I think you can see and follow them. I'll try not to start regrouping them, but rather just take them one by one. That's fine. Starting from the bottom I mean number one on what one what level are we expecting the Putsmeister delivers to continue on Q3 and H2 overall compared to Q2 level I think it's quite I mean overall if we look at our Putsmeister businesses so meaning Sweden Finland and Estonia we're looking at the development or the trading levels should be rather stable in an H2 to H1 comparison this year.

26:38 The Swedish market in Nordic is supporting the entire operation quite significantly given a much more brighter outlook and a strong order book at the moment as well. We do expect a few deliveries of concrete mounted pumps to happen in Estonia as well as in Finland, but clearly looking at the markets, Sweden is in a better position compared with Finland, especially Finland, which continues to be a tough environment. answer straightforward answer to your question quite quite stable considering the three markets number two this is in Finnish related to management performance bonuses if I try and translate it the question roughly goes that do the increased levels of management performance bonuses only impact this quarter or do they are they divided into a number of quarters.

27:50 The question is, or the answer is that they impact most significantly Q2. So clearly, so higher bonuses compared with the prior year where basically there were no bonuses paid. So that was a significant impact on the performance now in Q2. Then what the level of management performances for the rest of the year will be dependent on the trading of the business and the group overall toward the end of the year and then sort of normal procedures related to doing provisions and releasing those and so forth but yeah this is one of the periodic items that we commented during of the quarter.

28:52 Continuing, it sounds that the outlook for your business in the Q2 report is rather similar compared to what we said in Q1 report. Is that the right interpretation? Yes, it is. Of course, we would like these sort of comments to come more that we say the same things in a quarter after quarter. But to provide a bit more color behind the answer, I think The outlook we were sort of expecting, or we were not expecting, we were on alert seeing what the tariff related hassles will cause and what the impact will be. Q2, we did see very little impact out of that.

29:40 So it didn't really impact, these things didn't really impact our second quarter. I mean, and nor do we expect those to have direct significant impacts to our portfolio. Of course, we trade, we buy a lot of components, machines from different parts of the world, and there will for sure be some tariffs imposed to products supplied to us and partially to products that we sell. but we don't expect this to be major it's more around the general uncertainty in the world that sort of shadows the development of our businesses in short term which you know is quite difficult to say what the impacts will be but so far order books are where they are they're quite decent they're better than a year ago and that's why we sort of say that the coming months we expect to be at least quite decent I think I discarded one sorry I think there was a question of priority capital allocation priorities okay yeah sorry for that well I think the priority as we said as both of us with yes we commented I mean the issue of the hybrid was of course I mean it was the convertible was driven by both

31:18 are able to continue on the acquisition path. So assuming we would find businesses which fit our ownership criteria at valuation levels we are comfortable with and at the same time the financial standing of the into acquiring new companies there was a question which I take at the same time that what is our what is the leverage range we are comfortable with after potential new acquisitions so looking at the 2.3 x leverage at the moment given I mean as it is impacted by the hybrid the 20 million euro hybrid we have on the balance sheet plus the converter When we make significant capital allocation decisions, we look at the standing where we are as a group, as a whole. We look at the trading outlook of our businesses.

32:37 We look at the potential returns of that new venture, whether that being organic investment opportunity or an acquisition opportunity. and sum that all up and see what's the best alternative and what's the best way going forward. Sometimes that might mean that assuming you are at 2.3x you might be willing to take a view that we gear the balance sheet rather toward 3x if the case is really strong and we believe we can deliver downwards. It all depends on the number of items but But I would say as a guidance at this stage, looking at our leverage target 2 to 3x, given that we have those hybrid and convertible hybrids on the balance sheet, we'd rather remain on the lower end of that range or even below.

33:36 Continuing, I'll publish a few other questions here as well at the same time, because there were a few Maybe Jesse wants to take a few of the business questions. So on the technical trade side, there are questions why our fixed costs were up, especially on the technical trade. How much was driven by special electrode and should we expect clear organic increases also in the coming quarters? How would you comment that?

34:09 I would say, well, first of all, special electrode didn't affect the fixed costs too much. It was for the single hundred thousand euros. Yeah, 100,150,000 euros, give or take. Otherwise, there were more of one time items. So, for example, on the Buds Master side of things, there were investments in Bauma fairs and this type of non-recurring or once in a year type of costs, which we didn't have in previous years necessarily. At the same time, there's been some growth recruitments and investments on the OPEX side as well. We talk about systems and these type of things, which we don't see increasing going forward on a cumulative basis, rather that we have now taken some steps when we have seen growth in revenues and demands. but not a trend that we would expect that the fixed costs are increasing on the technical trade side.

35:14 Yes, maybe to complement that, there was another question that the number of employees have increased in technical trade. I'll take that away at the same time. Of course, the major contributor to that was the special electronic acquisition, but on the technical trade side, we have made investments into especially a few businesses, one being machineries, an auxiliary power business, so basically the business where we sell generators. many of you know that there's a strong trend behind data centers and overall sort of supply security topics in the world so that business has a positive trend we've made at the beginning of the year a couple of recruitments to that business we are also building on organization for example in a strong trend at the moment and a couple of other businesses the same situation on the electronic side which doesn't directly answer the question but also the same especially the same trend is at the moment going on in Milkkon where we look to invest more into meeting and meeting the demand that the defence industry currently poses, and also quite significant investments made in Delphin Technologies related to our ventures in the US market,

36:46 growth in China, and also in the European markets. So there are quite many businesses where we've done decisions I mean, investments in our case are not that much capex, but investments in organization and systems. And these things all, of course, add up not a single big thing, but the number of items of impact. A few questions on electronics, if you'd like to take those as well. What is the reason for the decline in electronics earnings despite sales growth? and the second one which is in finnish that there was a bit of a soft profitability of electronics business area in q2 do we see a improvement in the trend so maybe to if you can comment what was the reason behind the poorest or let's say somewhat of a soft result and then the outlook going forward yes so sales growth first of all came through

38:01 as mentioned a few places in the business area and then we had mixed performance in others so sales mix led to a bit lower margins especially some deliveries on the SSN side on the cost side and why the fixed costs are higher there's been recruitments in a few companies Delphin for example has made recruitments now executing their strategy there's been recruitment in Milkon and a few other organizations where there's a clear growth path and these fixed costs we are now taking in then simultaneously there's been OPEX investments in systems so ERP systems in a few companies now both in correlation with this Elfa Distrelec acquisition we have made investments in the ERP side of things and then we have also changed the systems in a few other companies for side.

39:05 Then finally, the margin effect on the profitability comes from the shifting landscape in the different businesses. So correlating to one of the questions regarding the Baltics electronics business going forward, there's been a tougher market in some of YEE's businesses now, for example, as well as in Poland, for DSS and Poland operations, which then in different quarters, different mixes, affect the EBIT differently.

39:43 Yeah, and there's one additional question which goes to what's the outlook in the Baltics electronics business and I guess this question has been asked because of the increasing importance of that market to us. I mean, it's been a tough market overall now already for a couple of years. I mean, since the war, Baltic economies have not been performing well, except for Lithuania, which has been now developing more positively in the last year, especially. But looking at our businesses, I think we started to see some positive... We came down for a few years after a significant peak upwards and growth trend, which was especially strong in Latvia. Now we are sort of back at pre-COVID levels.

40:30 There were some positive movements in the second quarter, but not at least clearly indicating sort of big booms or anything can decline but we're sort of at the moment at those levels which are similar to pre-COVID before the allocation situation and supply issue started in 2021 to 2022. A couple of final questions we start to be to come toward the end you indicated that you see clear profitability improvements in the current portfolio what are the most obvious profitability improvement opportunities so we have now there's a few different sort of categories in the group categories of companies I mean there are those companies which have been trading quite positively throughout the tough times as well.

41:29 I mean, businesses like Filterit, some of the other technical trade businesses also at Electronics, Milkkon, SSN, which have been sort of quite stable now for a few years and improving. I think there's a good trend on those businesses going forward as well. As we expected, we see that this year compared to 24, we see a part of the portfolio improving due to two things, our own actions, but also somewhat of an improved market. But there will be a certain amount of our portfolio related to construction, for example, and industrial businesses, which will not be on historical levels this year, but they have the significant growth, we see there's a significant upside in operational result once the market continues to support the rest of the businesses, which are still, from a market point of view, in a challenging situation.

42:52 Continuing with final ones, organic growth jumps, there are significant jumps. Well, why is that um it is partially because there was i mean we we came uh let's say the cycling part of our portfolio came down significantly in uh q in uh 20 let's say starting from end of 23 toward 20 the first half of 20 uh four and still continuing i would say q3 24 So we came significantly now. Now we've been building our way back to where we have historically been for a few quarters. We're still not there, but I think as we've said, the trend is right. There are pumps between the quarters, but the trend is right.

43:43 And the beginning, if this is a signal of the beginning of a turnaround, I think we've already seen the beginning of the turnaround, but the potential is far away from being utilized and captured. So we still have companies in the portfolio which generate altogether a few million euro annual profit, which are really far away from where they have historically been. And the markets where they operate, they are overall down. So we haven't lost, for example, concrete mounted pump business. We haven't lost any market share in the last couple of years. It's just that there is no investment by the customers at the moment. And then once construction, for example, industry comes back in Finland, there's for sure, it is for certain that we will sell more machines that we sell today.

44:39 And then finally, you mentioned some more investment to marketing and personnel. Is this higher level of OPEX investments expected to continue? I think we already answered this through a couple of answers provided. We did more investments. The level of cost is higher compared to 24, but it's not that high on a year-to-year comparison as you saw now. That's the way we would frame it.

45:19 Okay, so that I think was the last question.

45:23 Many thanks for those as always. Appreciate staying on the line and following us. And overall, we would like to thank you for this session and look forward to seeing you in a couple of months again. Thank you very much. Thank you.