Boreo Plc, HALF-YEAR REPORT JAN. 1 TO JUN. 30, 2023

Boreo Plc, HALF-YEAR REPORT JAN. 1 TO JUN. 30, 2023

August 10, 2023, at 9:00 EEST

Moderate profitability and strong cash flow

April-June 2023

Net sales grew by 5% to EUR 42.3 million (2022: 40.4).
Operational EBIT increased by 1% to EUR 2.4 million (2022: 2.4), and was 5.6% of net sales.
EBIT decreased by 5% to EUR 1.7 million (2022: 1.8).
The profit for the period under review totaled EUR 1.0 million (2022: 1.1).
Net cash flow from operating activities was EUR 3.9 million (2022: -1.9 including operations discontinued in 2022).
Operational EPS was EUR 0.39 (2022: 0.44).
EPS was EUR 0.18 (2022: 0.28).
On June 8, 2023, Boreo announced that it had signed a share and purchase agreement concerning the acquisition of a health technology company Delfin Technologies Oy.

January-June 2023

Net sales grew by 15% to EUR 83.3 million (2022: 72.1).
Operational EBIT increased by 27% to EUR 4.4 million (2022: 3.5), and was 5.3% of net sales.
EBIT grew by 30% to EUR 3.1 million (2022: 2.4).
Net cash flow from operating activities was EUR 4.6 million (2022: -0.4 including operations discontinued in 2022).
The profit for the period under review totaled EUR 1.5 million (2022: 1.5).
Operational EPS was EUR 0.66 (2022: 0.67).
EPS was EUR 0.25 (2022: 0.33).
Net debt relative to operational EBITDA of the previous 12 months was 2.4 (2022: 2.5 and 2.4 at the end of the previous quarter).
Return on capital employed was 11.2% (2022: 10.9% and 11.3% at the end of the previous quarter).

Financial guidance and business model

Boreo's primary objective is sustainable long-term profit generation. This is achieved with a business model that is based on the acquisition and ownership of great entrepreneurial companies with ability to generate sustainable long-term earnings growth and strong cash flows. The profits generated by the portfolio of companies are re-invested back to operations or to acquisitions with attractive expected returns on capital. The decentralized operating structure promoting culture of ownership and release of entrepreneurial energy is a core pillar of the firm’s business concept and sustainable earnings growth is ensured through the support and coaching of companies and the personnel.

Boreo’s focus is on earnings growth with attractive return on capital. The company's long-term strategic financial targets are:

Minimum 15% average annual operational EBIT growth
Minimum 15% Return on Capital Employed (ROCE)
Net debt to operational EBITDA between 2 and 3 (including acquired businesses as if they had been held for 12 months at the reporting date)

Boreo’s dividend policy is to pay an annually increasing dividend per share, considering capital allocation priorities.

The above-mentioned strategic financial objectives still serve as the company's financial guidelines. In line with its guidance policy, the company does not give separate short-term financial guidance.

In August 2022, Boreo sold its entire 90% holding in the electronics component distribution business in Russia. For 2023, all figures in this half-year report relate to continuing operations, unless otherwise stated. In the income statement, the comparison periods have also been adjusted for continuing operations, while the data in the cash flow statement have not been adjusted in the comparison period and include discontinued operations. The December 31, 2022 balance sheet no longer includes discontinued operations. Other than that, the accounting principles of this review do not include any changes that affect comparability. The comparison figures in brackets refer to the corresponding period of the previous year, unless otherwise specified.

Group’s key figures

Key figures, continuing operations
EUR million	Q2 2023	Q2 2022	Change	H1 2023	H1 2022	Change	2022
Net sales	42.3	40.4	5%	83.3	72.1	15%	160.4
Operational EBIT	2.4	2.4	1%	4.4	3.5	27%	8.7
relative to the net sales %	5.6%	5.8%	-	5.3%	4.9%	-	5.4%
EBIT	1.7	1.8	-5%	3.1	2.4	30%	6.5
Profit before taxes	1.1	1.3	-15%	1.9	1.7	9%	5.5
Profit for the period, continuing operations	1.0	1.1	-13%	1.5	1.5	1%	4.4
Profit for the period, discontinued operations	0.0	-6.6	-	0.0	-5.9	-	-4.7
Operational net cash flow***	3.9	-1.9	-	4.6	-0.4	-	4.1
Cash conversion, %***	165%	-47%	-	104%	-8%	-	51%

Equity ratio, %	36.4%	32.5%	-	36.4%	32.5%	-	35.4%
Interest-bearing net debt	35.7	34.6	3%	35.7	34.6	3%	30.9
Interest-bearing net debt relative to operational EBITDA of the previous 12 months*	2.4	2.5	-	2.4	2.5	-	2.2
Return on Capital Employed (ROCE %), R12	11.2%	10.9%	-	11.2%	10.9%	-	10.4%
Return on Trade Working Capital (ROTWC %), R12	29.0%	27.1%	-	29.0%	27.1%	-	26.7%
Return on equity (ROE %), R12	11.3%	11.4%	-	11.3%	11.4%	-	12.1%

Personnel at end of the period	340	300	13%	340	300	13%	327

Operational EPS, EUR**	0.39	0.44	-12%	0.66	0.67	-1%	1.82
EPS, EUR**	0.18	0.28	-36%	0.25	0.33	-24%	1.12
EPS, EUR, discontinued operations	0.00	-2.27	-	0.00	-2.03	-	-1.56
Operational net cash flow per share, EUR	1.44	-0.72	-	1.77	-0.14	-	0.82

* Calculated in accordance with the calculation principles established with financiers. The formula for calculating the indicator is presented later in this report.**The effect of the interest rate of the hybrid bond recorded in equity adjusted by the tax effect is considered in the calculation of the EPS starting from Q1 2022. In Q2 2023, this net effect was EUR 0.12 per share, in H1 2023, the net effect was EUR 0.24 per share, in Q2 2022, the net effect was EUR 0.12 per share, and in H1 2022, it was EUR 0.19 per share. ***Cash flow for comparison periods includes discontinued operations. The formula for calculating the indicator is presented later in this report.

Q2/2023 - CEO Kari Nerg:

Financial highlights

Moderate profitability and strong cash flow

Our profitability in the second quarter was moderate and cash flow strong. We reached a reasonable result despite challenges at Signal Solutions Nordic (SSN) and Floby Nya Bilverkstad (FNB) and the exit from SANY operations in Finland and Sweden which impacted operational EBIT negatively by EUR 0.2 million. The challenges of SSN and FNB are expected to be of temporary nature and ease in the coming quarters. Growth of the Group’s operational EBIT in the first half of 2023 was at a good 27% level.

Operational EBIT of EUR 2.4 million (5.6%) was at last year’s level. The Filterit, J-Matic and Lamox acquisitions completed in recent quarters improved the result by EUR 0.5 million, whereas organic earnings growth was negative of EUR 0.5 million mainly due to challenges at SSN and FNB.

Cash flow of the quarter was strong and operative cash conversion increased to 165%. Return on Capital Employed (ROCE) of 11.2% and Return on Trade Working Capital (ROTWC) of 29.0% remained stable.

Due to strong cash flow, net debt remained at the level of previous quarters and was EUR 35.7 million. Net debt relative to the 12-month operational EBITDA was 2.4. We strengthened the company's financial position with a EUR 8 million financing package increase agreed with our main financier. This increase provides opportunities to act in the M&A market and supports the management of operations.

Profitability supported by Technical Trade and Electronics Business Areas

The second quarter’s profitability was supported by the steady performance of our Technical Trade BA. All companies of the business area continued to operate well, and operational EBIT margin was at 10.3%. Profitability of Electronics business area was moderate (6.4%) and cash flow strong. The net sales and result of the business area was affected by SSN’s challenges and low operating result which was due to the company’s main customer continuing to push its R&D investments to upcoming quarters.

The performance of the Putzmeister operations in the Heavy Machines business area was as expected and the operational EBIT margin was 5.1%. At FNB, we have undergone investments in production processes and implementation of a new ERP system. As a result the company’s operative result was negative and impacted the business area’s profitability of the quarter and the first half of 2023.

Strong cash generation driven by the release of working capital from SANY operations

The quarter’s cash flow was strong supported by the release of working capital from SANY operations in Finland and Sweden. Development of capital efficiency was positive in most of our companies and I am pleased of the progress we have made in rooting the capital efficiency mindset in the organization.

In Machinery, our largest company, we did not achieve the targets set for capital efficiency for H123, and currently more than one-third of the Group's working capital is tied to Machinery’s operations. With Machinery’s current high levels of working capital and the group-wide focus put on capital efficiency, we see an opportunity to release cash from working capital in the second half of 2023.

The business environment is challenging, but we remain confident in our ability to deliver improving results

Signs of a weakening economic cycle and cooling down demand increased in the second quarter, especially in our companies serving the construction industry. However, orderbooks of our companies continue to be mainly healthy and our diversification across various industries as well as the strong market positions of many of our companies in the value chain provide protection in an economic downturn.

Therefore, we expect pressure on short-term performance, but remain confident that we will be able to continue on the path of an annual earnings growth of at least 15% in the future.

In addition to continued earnings growth, we see potential to improve capital efficiency by releasing working capital in the second half of 2023. Since Q322, we have successfully reduced working capital and as of Q223 the Group’s operative working capital amounted to approximately EUR 31 million. The normal sustainable working capital level for our current businesses is closer to EUR 25 million and our aim is to move towards this mark during the second half of 2023.

Strategic highlights

Acquisition of Delfin Technologies

In June, we announced the acquisition of the health technology company Delfin Technologies. The company manufactures scientifically validated, hand-held skin and edema measurement instruments. The Delfin acquisition is yet another excellent example of a company that we see to meet well to the target criteria of companies we want to own in the long run. The company has a long history of generating high margins and strong returns on capital. We are excited about the opportunity to work with the company’s organization and create sustainable long-term earnings growth. The acquisition also serves as an entry to the intereresting world of health technology.

First version of Boreo’s operating manual – Boreo Book – serving as the backbone for future development of the firm

Following the systematic development work done on our business and operating model since 2020, we were glad to finalize in June the version 1.0 of our operating manual – Boreo Book. The Book discusses the core elements of our crystallized philosophy: sustainable long-term profit generation – decentralization, capital allocation and long-term view. The finalisation of the Book marks an important milestone for us as with its content we consider having been able to arrive into a simple enough of a framework that will serve as the foundation for the building of Boreo for many years to come.

For purpose of communication of contents of the Book and our philosophy in general, we plan to kick-off in Q323 a series of writings related to factors relevant to long-term development of the firm. With the launch of this series, labelled as the ‘Boreo Series’, we aim to provide our stakeholders with additional insight to the fundamental philosophy used in the development of the Group, our companies and people.

All in all, we remain humble and dedicated in continuing doing our best for the interest of our shareholders. We are constantly reviewing potential acquisition targets, and our goal is to continue acquiring new companies that fit our target profile and that we can acquire within the framework of our investment criteria. At the same time, we want to maintain a stable financial position in line with the recent history.

Briefing for investors, analysts and media

A webcast where CEO Kari Nerg and CFO Aku Rumpunen present the 2023 half-year report will be held today, August 10, 2023, at 11:00 am EEST. The presentation is in English and questions can be asked after the presentation. The presentation material is available before the webcast on Boreo's website: www.boreo.com/investors.

You can watch the webcast at: https://boreo.videosync.fi/2023-q2-results.

The event will be recorded and the recording will be available after the event at: www.boreo.com/investors.

Vantaa, August 10, 2023

BOREO PLC

Board of Directors

Additional information:

Kari Nerg CEO tel +358 44 341 8514

Aku Rumpunen CFO tel +358 40 556 3546

Distribution: NASDAQ Helsinki Ltd Financial Supervisory Authority Principal media

www.boreo.com

Boreo in brief:

Boreo is a company listed on Nasdaq Helsinki that creates value by owning, acquiring and developing small and medium-sized companies in the long-term. Boreo's business operations are organized into three business areas: Electronics, Technical Trade and Heavy Machines.

The Group's net sales in 2022 were EUR 160 million and it employs over 300 people in seven countries. The company’s headquarter is in Vantaa.

Attachment