Boreo (Helsinki:BOREO) Q4 2022 Earnings Call

0:00 Good morning from Vanta from the Boreo headquarter and welcome to this webcast in which we will go through the Q4 2022 highlights, financial performance and also discuss the financial performance of Boreo in the last couple of years. My name is Karin Erkki. I'm the CEO of the company and Akko Rumpunen, our CFO, is here together with me to discuss the recent happenings in the company. Agenda looks like follows. So I'll be starting the webcast with the elaborations on 2020-2022.

0:53 Developments in the company continue thereafter to 22 and Q4 2022 highlights and thereafter Aku will go through the business performance at group level and business areas in more detail and after the presentation we're happy to take questions that you can pose by using the chat function that is there available in the webcast link as well. So welcome on board. First of all I wanted to bring a couple of reflections to what has happened in the firm in the last three years. Those of you who have followed us in the last months and quarters are familiar with these slides, but nevertheless, laying out the context to our 2022 performance and beyond to Q4 2022 as well.

1:53 So, a few key points I wanted to note out. First of all, we are, of course, happy on the development that we have seen financially and strategically in the firm since 2020, which can be seen as the start of the Boreo era, followed by the acquisition of majority shares in Yleis Electronica by Priato Capital in 2019. Thereafter, we have done a significant amount of work to build up what Moreo today is, a diversified serial acquirer, set up the decentralized organization, launched a new strategy, revised it once in 2022 as well, and taken on, let's say, the lessons from the last couple of years of operations as a serial acquirer to the way we develop the company today and the way we intend to continue developing the business going forward as well.

3:04 Acquisitions have been an integral part of our value creation journey in the last three years and will also continue to be in the years to come. We have now executed close to 20 transactions in in the last three years, the latest one which we announced today. Today is a small add-on acquisition to support what we call a business within our technical trade business area. And I think that now overall, if you look at the performance, we start to see the first signs of our ability to create shareholder value in the long run. the earnings have developed and sales positively, whereas we have room to improve with regards to our capital efficiency and returns on capital.

4:02 Also, it's important to note that when looking at the three years back, it has not been only, though we have not proceeded only as they say in movies, we have had some difficulties challenges that has been posed in 22 because of the exit from our electronics distribution business in Russia. Also, we spent close to a year in 21 with the contemplated merger with CME Capital that ended up not going through at the end of 21. So reflecting, I mean, all that what has happened, very pleased all the way that we've been able to bring the company from where we started in 2019 and 2020 to where we are today.

4:55 So as we have reflected in our strategy update in September 22, going forward to focus will be on simply from a financial point of view in growing steadily the earnings earnings that we generate and also doing that in a way that it creates shareholder values of focusing more and more on return on capital. And importantly, of course, last but not least, developing the way we operate as a decentralized diversified serial acquirer. Two slides which I wanted to bring out here from 2020-2022 performance. I believe you will find interesting is the first in this slide.

5:40 Focusing on the graph that is on the bottom of this slide that is presented, so the earnings growth that we have generated from 2020 to 2022, from the 3.3 million euro operational EBIT to 8.7 million in 2022. The green bars there reflect that we've both been a good owner for our businesses during this time, for those businesses which were part of the group in 2020. So the total amount of, let's say, organic growth that we have created in this business amounts to 2.4 million euros, mainly driven by the performance of the old Yle Electronics in Finland, as well as the Baltic operations, as well as machinery that has developed well during the last couple of years. Acquisitions have comprised a larger share of the earnings growth that we've seen, so €4.8 million, as you see from the slide.

6:51 And already today, the profit contribution from those acquired businesses starts to be at the levels or even above the earnings that are generated by the portfolio. So overall, what we want to stress out with this slide is that we are meant to be an acquisition machine, an acquisition machine that will deploy a lot of the capital and cash flow that we generate into acquisitions. But at the same time, very importantly, we want and need to be a good owner for the business that we have and expect in our ability to be able to do so as well.

7:36 Then I think a very important slide also kind of breaking down a bit the performance you've seen by business areas in the last couple of years. So in this slide, you see the... net sales growth, operational EBIT growth, and operational EBIT margin growth by business areas from 2020 to 2022. The couple of boxes which are reflected there in green color indicate, in my opinion, quite well the strong and positive developments that we have been able to generate in the last couple of years So, within the electronics BA, operational EBIT has grown from €1.8 million to €4.2 million in 2022.

8:28 Also, the margin has been developing positively, close to 2% margin expansion or improvement in the electronics business area. In a similar way, you see a similar sort of a development in the technical trade business area from €1.3 million operational EBIT to €5.3 million and margin developing to double-digit numbers in 2022. Then on the less or positive side, we have not been successful in operating our heavy machines business area well during the last couple of years, partly due to a couple of reasons. One, the operating environment has been the more challenging.

9:16 for our businesses within the heavy machines business area. So a lot of disruptions in the supply chain, but also we clearly have had issues in the ramp up of our sunny excavator business of which we made a decision to exit from Finland and Sweden now in the course of 2023. So something where we clearly are focused on in bringing that business area back on track. And I believe that we have the toolbox also to get where we have been measured by, let's say, a relative profitability of the Budsmeister operations, as well as for the Wielberg study in Sweden in the years to come. Then importantly, looking at the last blue, the box with blue color there in the bottom.

10:20 We have also systematically invested into the group side of things of creating the organization that is driving the business, the business area organization, the group capability that are required to run the show. So 1.8 million euro more of cost attached to the group compared to 2020. We expect this development, the cost development, to face down in the years to come. So the more new businesses we acquire with less of an headcount and less of an overhead, those will come to the firm. So I believe an important source of scalability and also supporting our margin development going forward.

11:14 I hope that this, I think these are important slides to reflect that we've done really good. We've succeeded well in certain parts of our area, certain parts of our business at the same time. We have difficulties on the heavy machine side and believe in that, that we have the ability to bring that business area also to reasonable figures in the years to come. Then going towards 22, Overall, and then continuing with Q4, first of all, in Q4, we discussed in more depth, but we recorded a 2.2 million euro operational EBIT that would have been without the communicated right of related to the sunny operations, 2.5 million euros or 5.6% EBIT margin.

12:06 a steady and stable development in line with the expectations we roughly had when we approached the quarter and 15% EBIT growth, that 2.2 versus the quarter before. So we continue on the growth track. For the full year 2022 without the exit in Russian operations, we've generated 21% EBIT growth compared to last year, six percentage points above our 15% strategic target.

12:52 So well on our way in executing and reaching the targets on that in 2022. With regards to operational or return profile capital efficiency, we clearly have room to improve. So landing with regards to return of capital employed to 10.4% at the end of 2022. And Aku will then explain in more detail what is impacting that and how we intend to also gear that number upwards in the coming quarters and years to come. Our leverage, so net debt to operational EBITDA developed positively during the last quarter. So we deleveraged the business from 2.5 to 2.2 as a result of the operational result, strong cash flows, release of the working capital, and also partly due to the same proceeds received from the Russian exit communicated in Q3 2022. So that leaves I mean, overall, a leveraged position with which we feel to be comfortable, leaving also room to continue on the acquisition track, as we have done in Q1. So the filtered acquisition was done in

14:22 Q1, 23, and now we said before, communicated today, it was more, I don't know what to call me as well. Then very briefly on 22 strategic highlights. We took significant steps in relation to all our three strategic areas. So first of all, acquired nine companies throughout the years, completed nine acquisitions, a set field trip was completed now then in a couple of days on the side of 23. The key notions with regards to acquisitions are, in my opinion, the ones noted in the slide. So first of all, the companies we acquired clearly contribute to our objective of gearing up the margins, as well as capital efficiency of the whole group.

15:18 So in average, those companies we acquired have recorded a 15% EBITDA margin in the years before the transactions. So, a steady development or a steady level of profitability that we also want to see from our companies. Also, we have continued on the path of acquiring companies at decent valuations. So, in average, 3.9x EBITDA, excluding earnouts and with earnouts at 4.6x. tells, in my opinion, in our ability to maintain the discipline required in creating value through acquisitions.

16:06 2022, I think we took very significant steps both in the way we operate and run the firm. We established a lot of, let's say, new structures based on which the operations of our independent and rather autonomous companies are based on. The Boreo game plan concept could be framed also as a strategy concept. The Boreo clock that is shown in the picture in the slide, which lays out the board work of our companies, the monthly reporting work for our companies and so forth. These items together with, for example, the launch of Boreo Academy have been such which are important in running the firm and also making sure that once the company grows, we have a standardized ways of operating and developing the company as well.

17:10 And then importantly, I think when it comes to incentivization and when it comes to the question of aligning interest between our shareholders and and personnel, the 1.5 million euro invested in summer 2022 by personnel of the company as part of the direct share issue program that we made. Very important step overall also in our journey. So good development overall that we expect to continue also in the course of 2023. Then briefly on acquisitions, I already noted basically the highlights of new companies with strong margins and returns on capital.

18:01 One additional point I would like to note out here is also that especially when it comes to the filtering and the gematic transactions, we see both of these acquisitions important also from a point of view of of broadening our capital allocation universe. So basically meaning that if we look at the end customer, if we look at the nature of those businesses, as well as the end exposure from a customer point of view for those companies, those are clearly areas which we see as important for Boreos further development. So rather non-cyclical, areas of process industry, for example, here in Finland, is something that we see to form a good basis for continuing growth by filtering organically, but also to acquisitions going forward.

19:02 A second point I would like to note on this is related to the add-on of Busty to SKP as well as the LAMOX acquisition. These are also good signs that our companies and the key people in those companies have also started to capture better the thinking related to M&A and how M&A can be used as part of the strategic plans of those companies. Rather small acquisition, as you see from the numbers, but important, I think, from the point of view of development of those two companies. So good experiences that we continue to make in scaling our M&A capabilities and acquisition capabilities throughout the company.

19:52 Then, finally, last slide on my side. A dividend proposal for 2022, so our board proposes for the AGM to continue on the path of paying and increasing dividend per share. However, so that reflecting or copying the same approach that we already took in the year before. So first of all, that the board proposes to the AGM that a 0.22 dividend per share would be distributed and thereafter the board would have a authorization to at their discretion then thereafter to dividend out a second of 2022 which I believe also reflects the update that we made to our dividend policy in September 2022 so target to annually increasing dividend per share, but taking into account our capital allocation priorities.

20:58 So that's a recap from my side, and then I would leave the floor to Akku to go through Q4 2022. Mori, please. Thank you, Karri.

21:11 So recapping the last quarter of 2022, first starting from the quarterly net sales and operational EBIT that we certainly already reviewed. But as a recap, 15% increase in net sales from 39 million euro, 45 million euro year on year. Operational EBIT also 15% growth quarter on quarter, comparing to the last quarter of 2021. Profitability very much in line, stable against last year on a 5% level. However, noted here that now in Q4, as mentioned, we had one one-timer write-off of €0.3 million regarding the sunny businesses in Sweden and Finland. So excluding that, profitability in the fourth quarter would have been 5.6%, so a bit above 21 level.

22:27 Then rolling 12-month figures more showing the trend, how the business and the company has developed. 160 million net sales compared to 122. Increase of a bit over 30% there. On absolute terms, 38 million growth from where the companies that we have acquired during 21 and 22 impacted roughly 27 million. So inorganic growth was roughly 27 million now in 22 against 21. And the rest, roughly 11 million was inorganic, sorry, organic growth.

23:12 And then on the right hand side, rolling 12 month operational EBIT 8.7 million compared to 7.2 in the end of 2021. 21% increase, so a bit over our new strategic target. And the profitability also in the role in 12-month term, very flat now during the year on a 5.4% level. Then components of growth, net sales growth now in Q4. In the previous quarters, we have seen maybe more stability in the growth between organic and inorganic growth.

24:03 However, now in Q4, basically all from the growth came from the acquisitions during the 20, 22 SSN and InfraDex as well as Pronius. Organic growth on the other hand was slightly negative because of the heavy machines development. Also, the comparison period of Q4 2021 was very, very high. But coming back more on that one in the next slides. Then looking into the business area shortly, electronics continued operations.

24:55 So acquisition of SSN asset and InfraDex during the last year grew net sales very much now in the previous quarters, and operational EBIT also clearly above 21 level on 8.3% level. So very good performance in the Finnish operations a bit. Of course, differing between the companies, but overall performance as seen here in the figures, very good throughout the year and also in the last quarter. Also good performance continued in in Baltic countries. And overall, from the outlook side, order books intake is still on a good level, despite of still, of course, continuing uncertainty in the overall economic environment.

26:05 Then technical trade, there the growth of roughly 18% quarter on quarter came mainly from Ronius acquisition, from inorganic side profitability, also on a good level, a bit above Q4 2021 level. And also in this business area, of course, the year has been different from the performance point of view in different units, especially in machinery where still the power business division performed very strongly in Q4. On the other hand, the metal machine side in machinery has been suffering most from the Ukrainian crisis throughout the year, and still Q4 was challenged.

27:04 Construction businesses, both from Motti Kolmio and machineries construction equipment side performed according to our expectations, despite of the fact that the overall construction market is softening and the outlook is also there a bit, or contain uncertainties. And as Kari mentioned, two acquisitions now in the end of the year and in the very beginning of this year will provide us and support us with the new business opportunities now in the new industries. Then heavy machines, a bit different story here, as mentioned, negative sales now in Q4 against comparison quarter in 21, which was extraordinary strong, but what impacted mainly the Q4 performance here was still the continuing delays in the deliveries, especially in the Budsmeister business, which significantly impacted our performance and numbers in Q4. From profitability side also, the Sunny business did not perform according to our expectations. And once again,

28:41 to that business unit in Finland and Sweden. And F&B supported with the Lakmestan acquisition that we did in the end of last year. Good performance, despite of also delivery challenges in that business. So positive is still that we have good order books levels, and when this delivery delay topic slightly goes away, we definitely believe that we are able to bring the performance and the business to the levels that we have seen in the previous quarters.

29:30 Let's take a short technical to go out of presentation. Apologies for this.

29:52 And then other operations, ESKP and Westerbakka Transport here, still very stable. Net sales performance and also profitability decent despite of the high inflatory environment that we have seen in the end of the year especially. Then two very important KPIs. Return on capital employed, one of our strategic targets, where we aim to be over 15% level in the long run, ended to 10.4. in the end of Q4, slight decrease from Q3, 10.8% level and clearly below last year level. But as to be noted, as the title says, the hybrid bond that we issued in the beginning of 2022 now heavily impacted on return on capital employed and return on equity during the year, but now in the end of last year, the impact of that €20 million in the rolling 12-month terms is fully in, so that will not anymore increase the capital employed levels in the next quarters, which would definitely support also

31:23 the performance that we can see from these two important KPIs. And same goes with return on equity at 12.1%. here we closely monitor our level leverage levels um it has been roughly on 2.5 x levels in the past quarters and now nice to see that that dropped to 2.2 mainly because of good cash flow I will come back on the next slide a bit more on that one equity ratio solid a bit over and then I'll leave on the left earnings per share, grey bars especially, we should look into here, operative earnings per share, roughly 30% down compared to Q4 2021, but there we have to note that this hybrid bond interest impact was roughly 13 euro cents in the last quarter,

32:53 so excluding that, like for like, we would have been in the bar, barring EPS side. And cash flow, very good green bar with the operative cash flow amounting to 3.7 million euro now in Q4, supported by the release of working capital, roughly 1 million euro, which is our heavy focus now as we focus on the capital efficiency according to the to the updated strategic targets and priorities.

33:39 And also cash flow after investments, €2.6 million here, supported by the proceeds received from the sale of our restaurant business. So that is all from the financial side.

34:09 Thank you, Aku, and thank you for the questions that have been asked. I have a set of those here. If I start first with a few less non-financial questions, which are here. First of all, there is a question. which says that, would you like to say something of M&A going forward? And what is the window of opportunity from the point of view of market opportunities and from financial position of Foreo? A good question. Thank you for that. Pipeline. Pipeline, the one that we have at the moment, is and continues to be strong.

35:03 As we have said in the last quarters, we have, during 2022, more systematically started to work with sourcing activities within the VAs, so business areas, also including our companies, and this has yielded on a good pipeline that we have, which is a broad pipeline on which potentially there will be deals to come in the years to come. So plenty of discussions ongoing with entrepreneurs who might or might not be prepared to sell and join Boreo, let's say now in the short term or then in the longer run. So Overall, the pipeline is good, and what we see from the M&A market, more from the M&A community, so advisor activities that there is really deals to be, there is activity on the market.

36:08 The valuation levels here are slight, in my opinion, they are slightly lower than they were, let's say, a year ago. However, when it comes to good, companies that continue to be good regardless of broader economical situation. I think that still the prices are not that volatile, but definitely on somewhat lower level compared to where we have been. And we have a balance sheet. With our balance sheet, we believe that we are able to continue on the path that our strategic targets set.

36:53 Then of course, if we look to accelerate the M&A doings in a much more significant manner, then the capital structure is something that we need to work with. But we continue to focus our resources in sourcing and finding good companies and finding entrepreneurs who want to join join the family and thereafter we have the means to arrange in one way or the other. So that was first. Then the second question is related to the sunny exit. So any news related to the timeline and also if the exit process prolongs, is there a risk for additional write downs?

37:44 I mean, there's not much more to to say at this stage of what we've communicated. As Aku said, we have taken in a 0.3 million euro right of that exercise and expect to be able to manage that exit within those limits as well. It will take some months. I expect that in the course of first half of the year, we start to have a majority of that process sorted out, but it is sort of ongoing process with which we work and gradually we come out of that exposure that we have.

38:36 Then if we continue more towards financial, questions maybe to Aku first. There are a few questions related to networking capital. So two different questions. First, do you expect to be able to bring networking capital down more? Or how would you comment the current level? And the second question is, do you think there is room to release networking capital? How much?

39:04 Definitely, yes. I think we are only in the start in that kind of work. As I mentioned, we have been and we are focusing and bringing the kind of knowledge, training our personal people, keeping this topic heavily on the table in our monthly reviews. So yes, the answer is definitely we believe that further room to improve in working capital levels we have. what is the exact euro amount, that is a bit difficult to say. I would maybe say that we aim at gradually decreasing the levels, and that will then bring some euros also on the table.

40:01 Good.

40:02 Then we have, I think, two questions related to supply chain disruptions issues, and I think, if I read them correctly, these relate to to heavy machines mainly. First question is how much sales was transferred from Q4 due to supply chain issues and do we expect these to be recovered in Q1 2023? And also a question related is when do we see the supply chain disruptions easing? I would comment first on the delays or the transfer of deliveries on the heavy machine side. So we are talking about a couple of millions of euros of transferred sales. We do expect them to be recovered in 2023, not fully in 2023, most likely to a great extent in the first half.

41:05 But there continues to be now in particular regarding the Putschmeister business delivery issues. Those have been mainly related in the last year to chassis deliveries from the chassis suppliers to our OEM. But then at the moment, there are also some delivery issues which we experience at the side of our OEM. supplier that caused delays as well. But nevertheless, we believe that sales has not been lost. It's a matter of time when we will then see those and see those being recognized. Now then the supply chain disruptions is in question.

41:54 I think if we look at if Overall, I would describe it differs by business area and also different specific businesses, but I would say that definitely we start to see some signs of supply chain disruptions easing up or going downwards. Delivery times start to be shorter, but they are not there where they were before all this started at the end of 2020. So definitely issues continue to be there, but slowly it seems so, and the feeling is that delivery times are getting shorter, and then we are going towards that, let's say, more of a normal state.

42:43 Then you could take the next ones. First one is a question on price levels, so How much are our prices currently up year on year? Is there a difference compared to year four? And have we been able to offset cost inflation in technical trade and electronics? How would you address that?

43:12 A bit maybe a rounded answer, because the difference between our businesses and business units, but if we look at the long term, trend in gross margin that has been very stable. No major ups or downs there. So although price levels have been, and an inflatory environment has been impacting on the cost side, we have been able to do quite well to offset that increase.

43:48 Agreed. Then another question. This is still on order books. We mentioned that outlook is stable or cautiously positive, depending on or varying between business areas. How long is our visibility and how has our order backlogs developed?

44:12 I think we had that comment in the business area slides. So in all business areas, order intake that we follow on a monthly basis is on a good level. And we haven't seen basically any decrease in the order intake levels. Meaning that also the order books are on a good level. And the length of the visibility, uh diverse again quite a lot between businesses but but i would say that in heavy machines where we have different kind of units that for example in electronic components the visibility is is longer uh maybe one year or or or so where in other businesses it might be then some somewhat uh shorter but overall the order book and and the outlooks are are good Good.

45:22 Then continuing still a few questions. On group cost, there is a question that should we expect quarterly group operation cost level of Euro 0.6 million to be a good proxy for 2023? I would say overall, if we look at the run rate of group costs at the moment, as I mentioned in the beginning, we will see a declining a somewhat growing trend. For example, due to investments that we make on the ESG side, we're due to also that both in terms of personnel and so the team that has been put in place also means not only external, I mean, both personal cost increases to a certain extent as well as then working with external experts on that topic.

46:24 I would say now that this level is maybe slightly on the lower end, but significantly, let's say, in the ballpark nevertheless. Then there is a question on companies. Which companies do we expect to improve the most in 2023? I will say a few comments on that. First of all, Machinery is a company where you might remember that in the course of 22, we had issues with our metal machines business area that fell off the cliff due to the war started in Ukraine from a demand point of view. So we definitely expect to see a positive development out of that business area during this year.

47:27 And as such, we're contributing to the machinery's performance this year. Secondly, I would note out that Milkon, one of our businesses in the electronics business area, which is focused on the military side of things, continues to have a very good outlook on the demand side and further improving outlook. However, our ability to execute on that and capture the potential in concrete numbers has not been there yet. So I would note that as one single company as well. And then thirdly, also, I mean, you hear us, you've heard us talking about the heavy machines business area performance and lack of its performance in 2022. So definitely for that business area as a whole, we expect 2023 and the coming 12 to 18 months to be a period where we can bring the businesses back to where they have been. So I would say that those are a couple of reflections on that side. Then, There's still a question on availability situation within electronics and technical trade, and whether this had any impact on sales in Q4.

49:01 No, no significant. Maybe some in technical trading in pro-use business, but at least in machineries, I think that we did not have that as a reason.

49:13 Not even close compared to the heavy machines business area delays. I think we will wrap up with the last question. There is a question on different sector developments. Can we talk about that a bit? The question goes that I've understood that the outlook has improved due to the geopolitical situation, but how is this currently affecting your businesses and what kind of growth possibilities do we expect this to bring in the long term? That's a good question. I mean, I talked about the Milkkot point of view already before. So definitely on the electronic component side, electronic component distribution side there, we have a number of companies within that business area, which are supplying to the defense sector broadly.

50:06 So the investments that are taken to support support that development the positive trend there is we expect this to see this to have a positive impact for for many of our businesses in that area in a similar way we do have within the technical trade business area um cooperation uh related to related to defense sector and and definitely something that that we continue to to see a positive sign for example in 22 the the auxiliary power generators that we sell and market in Finland through machinery, there we saw a significant upward trend in demand and sales in 2022. So this type of different positive contributors to existing business and then on the M&A side at the same time as we have said before, we have been continuing to work on evaluating interesting acquisition opportunities on that side as well. So let's see what that might bring ahead.

51:22 And then there was still one additional question that came and I'll take that short one. So what are our expectations for logistics companies' profit development in 2023? As Otis refers to, when we talk about our logistic companies, we're talking about ESKP together with Vesterbacke and Basti that have been acquired with that. Overall, ESKP is performing well. It's a very good niche operator. In spite of all the inflation and pressure on margins that have been caused, cost for that business in the last one to two years still operates with really good margins in the context of logistics businesses and we expect this trend to continue so we have been successful in bringing on new business that supports the sales development And also the team is hardly working on making sure that cost efficiency is there and competitiveness from that point of view remains.

52:39 So we are, let's say, rather positively cautious or positively oriented towards that, but definitely not the easiest times for logistic businesses because of inflation that is there. With that said, I think that we are done with the questions. Many thanks for those and appreciate taking the time and listening in. We look forward to seeing you all again in the next update. Thank you very much and see you next time. Thank you.