Boreo Plc, INTERIM REPORT JANUARY 1 TO SEPTEMBER 30, 2022

Boreo Plc, INTERIM REPORT JANUARY 1 TO SEPTEMBER 30, 2022

November 3, 2022, at 9:00

Strong result and strategy update – focus on earnings growth and return on capital 

July-September 2022 (continuing operations)

• Net sales grew by 50% to EUR 43.3 million (2021: 28.8).
• Operational EBIT increased by 38% to EUR 3.0 million (2021: 2.2).
• EBIT amounted to EUR 2.4 million (2021: 1.4).
• Free cash flow (before acquisitions and divestments, including discontinued operations) was EUR 0.5 million (2021: -0.1). Cash flow was  weakened by the EUR 1.8 million increase in working capital. Capital employed tied in inventories decreased by EUR 1.6 million.
• The profit for continuing operations totalled  EUR 2.1 million (2021: 1.0).
• Operational EPS was EUR 0.83 (2021: 0.70).
• EPS was EUR 0.63 (2021: 0.38).
• Boreo announced that its subsidiary Floby Nya Bilverkstad AB (FNB) had acquired the share capital of Lackmästar’n i Håkantorp AB (Lackmästarn). The transaction took place at the beginning of the last quarter on 3.10.2022.
• Boreo’s updated strategy and strategic financial targets presented in Capital Markets Day. New strategic financial targets are: Minimum 15% average annual operational EBIT growth, Minimum 15% Return on Capital Employed (ROCE) and Net debt to operational EBITDA between 2-3x.

January-September 2022 (continuing operations)

• Net sales grew by 39% to EUR 115.4 million (2021: 82.8).
• Operational EBIT increased by 24% to EUR 6.5 million (2021: 5.3).
• EBIT amounted to  EUR 4.8 million (2021: 4.7). EBIT for the comparison period was significantly affected by a non-recurring EUR 0.8 million sales gain from the Espoo headquarters.
• Free cash flow (before acquisitions and divestments, including discontinued operations) was EUR -1.0 million (2021: -0.7). Cash flow was  weakened by the growth in working capital.
• The profit for continuing operations  amounted to EUR 3.5 million (2021: 3.3).
• The profit for discontinued operations  was EUR -5.2 million (2021: 0.7). The result was affected negatively by the write-down of Russian operations in the second quarter.
• Operational EPS was EUR 1.50 (2021: 1.45).

Classification of Russian operations as discontinued operations

On August 9, 2022, Boreo announced that it had sold its 90% holding in the electronics component distribution business in Russia (YE Russia). In this interim report, Russian operations have been moved to discontinued operations in accordance with IFRS 5. Unless otherwise stated, all figures in this interim report relate to continuing operations. 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 and include discontinued operations. For Q3/22, the balance sheet no longer includes discontinued operations. Discontinued operations also include the subsidiary of the Russian operations located in Turkey.

Financial guidance and business model
On September 27, 2022, Boreo announced its new strategy  and strategic financial objectives, which were presented same day in capital markets day. Boreo's business model is to own, acquire and develop operations in Northern Europe. Boreo focuses on value creation in the long-term and its aim is to be the best home for its companies and personnel.  The main focus areas of the strategy are: Acquisitions, Development and People & culture.

In the future, Boreo will focus more clearly on earnings growth and return on capital. The company's updated 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 2-3x (including acquired businesses as if they had been held for 12 months at the reporting date)

Boreo’s updated dividend policy is to pay an annually increasing dividend per share, taking into consideration 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.

As of the Q1 2022 interim report, Boreo has changed the accounting principle of operational EBIT so that operational EBIT no longer takes into account the impact of the allocation of acquisition costs. The impact of the allocation of acquisition costs arises from the depreciation of fair value allocations at the time of acquisition based on IFRS during their useful life. The company feels that operational EBIT before allocation of acquisition costs better reflects the profitability of its operations. The change has an impact on operational EBIT and operational EPS. The figures for the comparison period have been adjusted to reflect the same principle to maintain comparability. 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	Q3 2022	Q3 2021	Change	Q1-Q3 2022	Q1-Q3 2021	Change	2021
Net sales	43.3	28.8	50%	115.4	82.8	39%	122.0
Operational EBIT	3.0	2.2	38%	6.5	5.3	24%	7.2
relative to net sales, %	6.8%	7.5%	-	5.7%	6.4%	-	5.9%
EBIT	2.4	1.4	75%	4.8	4.7	2%	5.8
Profit before taxes	2.6	1.0	150%	4.3	3.9	12%	4.6
Profit for the period, continuing operations	2.1	1.0	113%	3.5	3.3	6%	3.9
Profit for the period, discontinued operations	0.7	0.2	248%	-5.2	1.0	-	1.6
Free Cash flow***	0.5	1.5	-66%	-1.0	-0.9	-	1.1
Equity ratio, %	35.1%	24.4%	-	35.1%	24.4%	-	23.8%
Interest-bearing net debt	33.9	39.3	-	33.9	39.3	-	41.0
Interest-bearing net debt relative to operational EBITDA of the previous 12 months*	2.5	3.6	-	2.5	3.6	-	3.8
Return on Capital Employed (ROCE %), R12	10.8%	12.3%	-	10.8%	12.3%	-	13.4%
Return on equity (ROE %), R12	13.1%	27.8%	-	13.1%	27.8%	-	28.6%
Average number of personnel	301	264	14%	301	264	14%	270
Personnel at end of the period	304	265	15%	304	265	15%	273
Operational EPS, EUR	0.83	0.70	19%	1.50	1.45	4%	1.86
EPS, EUR	0.63	0.38	66%	0.97	1.26	-23%	1.40
EPS, EUR, discontinued operations**	0.29	0.07	314%	-1.74	0.33	-	0.59
Free cash flow per share, EUR***	0.19	0.63	- 69%	-0.36	-0.34	-6%	0.42

* Calculated in accordance with the calculation principles established with financiers. The formula for calculating the indicators is presented later in this report. Figure for Q1-Q3 2021 and the situation at the end of 2021 adjusted to reflect the definition of continuing operations.
 **The effect of the interest rate of the hybrid loan recorded in equity adjusted by the tax effect is considered in the calculation of the EPS starting from Q1 2022. In Q3, this net effect was EUR 0.12 per share and EUR 0.31 per share in Q1-Q3.
*** Cash flow includes discontinued operations.

Q3/2022 - CEO Kari Nerg:

Strong financial performance

In the third quarter our companies continued to perform steadily and we reached a record-level operational EBIT of EUR 3.0 million (6.8%). The operational EBIT increased by 38% from the comparison period. Net sales, in turn, grew by 50%, of which organic growth amounted to EUR 7.4 million and growth from acquisitions to EUR 7.3 million. The drivers of the strong financial performance were the Electronics and Technical Trade business areas, as well as ESKP reported under Other Operations. The performance of the Heavy Machines business area was on non-satisfactory level and our focus is on improving profitability.

Return on capital employed (ROCE) that we set as a new strategic financial target in September 2022 was 10.8%. Return on equity (ROE) was 13.1%. The Group's financial position remained stable and net debt relative to the 12-month EBITDA remained at the 2.5x level.

Outlook for the near future remains stable, however numerous uncertainties in the operating environment

The general operating environment is currently shaded with dark clouds and 2023 is expected to be challenging due to high inflation, rising interest rates, geopolitical uncertainties and continuing supply chain disruptions. However, the outlook for our companies’ performance in the near future remains broadly stable in line with previous months and we continue  to develop and strengthen the competitiveness of our companies.

In addition to nurturing our performance we are  focusing on efficient use of capital, and over the next quarters our aim is to reduce the level of working capital tied to the business. Our focus is on creating growth through organic measures and acquisitions and strengthening our businesses in selected industries. To prepare for rising interest rates, we have hedged close to half of our senior loans, and a fixed-rate hybrid also hedges the Group from interest rate increases.

We will continue to closely monitor the operating landscape and consider our decentralized operating structure as a strength in challenging economic times. Our companies are capable to quickly adapt to changing market conditions and I am confident that we can operate successfully also in a more challenging environment.

Updated strategy and new strategic financial targets pave the way for long-term value creation

At the end of the quarter, we organized the company’s first Capital Markets Day where we presented our updated strategy and strategic financial targets. We will continue to work on long-term value creation and building a successful company. In line with the new strategic financial targets – minimum 15% average annual operational EBIT growth and minimum 15% ROCE – we focus more clearly on generating earnings growth with attractive return on capital.

The new strategic targets create an excellent foundation for continuing the long-term development of the company. In the near future we focus on developing the Boreo way of working and steering the ship towards reaching the strategic targets. The strategic plans prepared in part of our companies, the newly set common financial targets as well as hurdle rates for acquisitions and organic growth investments are examples of recently implemented initiatives. These initiatives we expect to strengthen the basis for creating future earnings growth.

Attractive opportunities to continue allocating capital to acquisitions

During the quarter, we announced one acquisition as FNB acquired Lackmästarn, a specialist in painting, surface treatment and varnishing of heavy vehicles.

Over the past quarters, we have completed a significant amount of proactive work to identify acquisition opportunities that strengthen our business areas and develop M&A capabilities. This work together with Boreo having become more known in the marketplace has contributed to the creation of a good quality acquisition pipeline. Despite the general cooling down trend of the M&A market, I am confident in our ability to complete acquisitions of companies that fit to the Boreo family.

Vantaa, November 3, 2022

BOREO PLC

Board of Directors

Distribution:
NASDAQ Helsinki Ltd
Principal media
www.boreo.com

For more information:
CEO Kari Nerg
+358 44 341 8514

CFO Aku Rumpunen
+358 40 5563546

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 Northern Europe. Boreo's business operations are organized into three business areas: Electronics, Technical Trade and Heavy Machines.

Boreo’s main objective is to create shareholder value in the long-term. It aims to achieve this with an acquisition-driven strategy, creating optimal conditions for its businesses to increase sales and improve profitability and by being a best-in-class home for its companies and personnel. ​

Net sales of the Group’s continued operations in 2021 was 122 m€ and it employs over 300 people in seven countries. Boreo’s headquarter is located in Vantaa.

Attachment

• Boreo_interim report_Q32022