Good morning. Good morning from the Boreo headquarters in Vantaa, and welcome to our Q3 2022 webcast. My name is Kari Nerg. I'm the CEO of Boreo, and our CFO, Aku Rumpunen, is here today with me to go through the highlights of Q3 2022. Agenda is as normal in our webcast, so I will be recapping first quickly the financial highlights as well as strategic highlights of the quarter. Thereafter, Aku will discuss more in depth about the financials and the performance of our businesses. Followed up with the presentations, we will take any questions you may have during the presentation.
Please use the Q&A function that has been made available in the link there. Getting all started, as the already headline said, Q3 was a successful quarter for us in terms of financial performance. It was also an important quarter for us as we updated our strategy and introduced our new strategic financial targets. In terms of numbers, we recorded a 50% net sales growth, as well as the 38% operational EBIT growth. Net sales growth was driven both by acquisitions, so transactions we have completed in particular during Q1 and Q2 this year.
The underlying growth in our businesses was strong and contributed also significantly to the growth we experienced during the quarter. Operational performance and in terms of profitability, operational EBIT at the record level of EUR 3 million, close to 7% operational or EBIT margin, is a good result and achievement from the businesses that we currently have. We're very pleased with the performance we were able to introduce during the quarter. The financial standing of the company remains stable, so net debt to operational EBIT at 2.5x, in the middle of our strategic target level 2-3x range.
Those of you who have followed us during the last months and we looked into further detail on how our strategic new financials targets look like. Return on Capital Employed, our new strategic target where we aim to go to above a level of 15%. We're currently at 10.8% as expected, and are targeting and directing our doings going forward to reach the level that we have set for the business.
If we look at, Aku will discuss the performance of the business in more detail, but in a broad context, profitability was driven during the quarter by our electronics, our technical trade, business areas as well as Etelä-Suomen Kuriiripalvelu, our logistics business that is reported under other operations. The profitability of heavy machines, our heavy machines business area is not where we accept it to be. There we are working hard with the team to improve our profitability going forward. Here in this slide, you see the rolling 12-month numbers. Electronics recorded during the quarter close to 8% EBIT margin. Technical trade was above 12%.
Heavy machines business area at around 2%. If we look at the business on where we stand and surely everyone's interested about the outlook going forward under during this, let's say, challenging and uncertain environment. We continue to be rather confident on the ability of our businesses to perform during the next or in the short term. The signals we hear and see in our businesses for the short term are broadly said rather stable. As already reflected in the new strategic financial targets, our focus is on a longer term on earnings generation and efficient use of capital.
Especially, now during the next quarter and in the short term, we do see a need to reduce the amount of capital tied into the business. As you have heard us before communicating that, we have been securing our ability to serve our customers through increasing our inventory levels and tying capital into the business. Definitely there we have some optimization to do, and we're focused on doing that in the next quarter. As you already see from the figures, we have two, or let's say two of the three business areas that are currently performing well. One is not where we like it to be.
On the other hand, this also is one of the strengths we see in our business model, the decentralized operating structure as well as the diversification of the portfolio, this is a strength during challenging times. Some of the businesses will support the others and the group performance, depending on quarters. Also, I would like to note that, with regards to the way we operate and the way we are structured in case the operating environment changes and drastic changes happen, we are of course able to adapt quickly if needed. Overall, continuing to see positive developments in the companies and we are focusing on making sure that we come out strong even challenging times as well.
Turning more into the strategic side of things, I brought up here to the presentation a couple of slides from our strategy update. Some of the points I wanted to kind of reconfirm or discuss about on what were the key highlights of our strategy update, and I'll be briefly talking about M&A developments as well, which continue to be in the core of what we do.
First of all, with regards to the update of the strategy, looking back at the last three years, we've gone through a significant transformation from an electronics distribution businesses only towards a business that can be called a serial acquirer, more of a diversified serial acquirer. The financial performance has been strong. We've recorded significant growth of earnings and sales during the last years.
These results, I mean, we can be proud about the results, considering that we have taken a hit from the exit of our Russian operations that we completed a couple of months back, and also considering that a lot of the time last year was spent on the Sievi merger that never went through. Something of which we can be proud about. Now going forward, we will continue on the and expect to continue on the, let's say, growth journey. We aim to continue the transformation of the financial profile of the company.
Clearly, through acquisitions but also, through development actions of our existing businesses to transform the financial profile towards higher operating margins and stronger businesses by nature. Really, as you will hear in the next slide as well, we continue to develop our operating structure, the way we work, in order to make sure that we reach the targets that we have set for the future. On this slide, I wanted to bring, let's say, the updated illustration of our business model into this presentation. These points pretty much reflect the changes also that we implemented on the strategy update side.
First of all, the two upper points up there on the upper end of the slide and on the right-hand side, we crystallized and are in the process of crystallizing our profile as an owner. We want to be an owner of good and great entrepreneurial companies that generate strong profits but also generate a lot of cash flow. Importantly, our profile as an owner when it comes to the way we develop our businesses or how we support our businesses, this is an important point from a practical point of view of managing the company.
We have put more of an emphasis on the supportive and coaching side of things, so that a lot of the majority of the operational decisions are done in the operational companies that we have. The role of the mother company, Boreo and the divisions is to support, is to be a supportive owner and developing, continuing to develop the businesses that we have and developing also our personnel. When it comes to then more of, let's say, the M&A side of things or creating organic growth, we have already introduced quite a lot of additional discipline into the way we look at investing capital or deploying capital into organic growth initiatives but also acquiring new companies.
Introducing thresholds when it comes to what type of financial metrics do we need to see and want to see from our businesses, as well as looking at the business profile, personal aspects and ESG aspects in more detail. This is, I believe, quite of a good illustration and an explanation of what the whole business model is about. We continue to execute and make the machine even more better in the next years. The new strategic targets can be classified under the topic of, let's say focus on a more clearer focus on earnings growth and return on capital. The new strategic targets are the ones you see on the slide.
We look to generate a minimum 15% operational EBIT growth over the long term and grow with an attractive return profile, so, which we measure through return on capital employed or ROCE. We believe that compared to the earlier targets, which were net sales and operational EBIT growth and the same leverage target, these better reflect on what we believe to create shareholder value in the long term. The dividend policy we also slightly adjusted to account for the, let's say, developed capital allocation thinking. You have seen us yesterday releasing and announcing that we will distribute the second part of our dividend for year 2021.
We're going forward with dividend decisions with the, let's say, point of taking into consideration capital allocation priorities is something that we want to introduce into our dividend policy as well. To give you a bit more insight into what we are about to do in the next months with regards to development of the company in more detail, three headlines here. First of all, we continue to put focus and resources in developing our operating model and governance structures overall. This is one of the key initiatives for us over the next quarters.
The objective here is to further and further crystallize and clarify the way we operate in reality, not only the way that we communicate on our strategy to our stakeholders and how we intend to reach our strategic targets, but how in reality we run the company, how we expect our key leaders and broader group of people to operate both from a financial but also from an ethical point of view. These are clearly items which we see to be of the essence in order to create a long-term successful business and to make it clear on what are the roles and responsibilities in the group as a whole.
This is something where we are currently working with also with regards to ESG topics where we currently have out our stakeholder surveys which will be one of the key topics also for us in the coming years. Secondly, as a continuation of setting new strategic financial targets, we are working with our business and have introduced a new operational or financial KPIs to our businesses. In addition to talking about the P&L, profit and loss statement, items and sales and margins and profitability, we have taken a step towards starting to more and more talk about cash flow, return on working capital, and the way we manage our working capital.
In order to ensure that from every single business in our group and the way they are steered also will eventually contribute to us reaching the targets that we have set. Something very important on the back of this to enable this, we have earlier during the year also invested into new group consolidation systems that enable us to increase the visibility that we have on the businesses and enable importantly also benchmarking and sharing best practices when it comes to and between our businesses. Last but not least, on the side of development of operations, you have heard us talking about in the last months about the Boreo game plan concept.
We have already rolled out the so-called strategic roadmap work during the year in roughly half of the businesses that we have. We're most advanced on the side of our electronics business area, whereas also started and completed part of the plans in our technical trade business as well as in other operations. A heavy machines business area is there as a next business area where we put further focus on.
I believe this is something quite important for the company as a whole, as we, in many of our businesses, this is the first time when such type of longer-term, midterm roadmaps are set and these are also very important in order to make sure and kind of enable the autonomous operations as part of the group as well. Work that we expect to yield on a longer term basis, results from a financial point of view, but also ensure that our companies continue to go to the direction that we expect them to go as well.
As a last slide, that was more on the, let's say, strategic side of this when it comes to the development side of things, what we do with the business, and the group as a whole, and where our focus will be in the coming months. With regards to M&A, the Q3 continued to be an active quarter. We completed one small acquisition. Our Swedish subsidiary Floby Nya Bilverkstad AB acquired a company called Lackmästar'n i Håkantorp AB that is a company specialized in painting and surface treatment of heavy vehicles. A supplier, already an existing supplier to FMB, which we expect on this transaction to yield some operational synergies over the longer term and secure also the important painting capabilities and capabilities for FMB.
This deal was announced during the quarter, completed in early Q4. We completed the Russian exit. Russian exit meaning for us the exit from our electronics distribution businesses that were there as part of the former Yleiselektroniikka for close to 30 years. This exit was a full exit from our point of view. I mean, the exit has gone as planned. We still have some proceeds that we are expecting to arrive from this transaction, but so far everything has gone according to our expectations as well.
Turning a bit to the future, we've done over the last months a lot of work when it comes to developing our M&A capabilities, introducing processes, pushing down the M&A capability, especially to our business area organizations as well as to partly our companies. Positively, we have started this work to yield more and more interesting acquisition opportunities, which we are creating directly from inside the business. We currently are working with a number of interesting transactions that complement our existing business areas and also complement and contribute to the ambition that we have to create new subsectors under the business areas as we explained during the Capital Markets Day as well. Positive trend when it comes to M&A pipeline development.
Something that I expect we're pretty confident on our ability to continue executing transactions. Of course, during the challenging or uncertain times, one needs to be rather careful on valuation of the businesses and looking at on where the businesses are with regards to the profitability. But nevertheless, on the M&A side, things look rather well and interesting, things hopefully to come in the coming months. Last, I would point out that of course also, when it comes to the inbound that we see from a deal sourcing point of view, we feel that the Boreo brand is slowly but surely getting more recognized.
We're becoming more known to the market and also continue to see and then continue to get more and more deal flow out from the M&A communities as well. This was the update from my side. I would then turn the page to Aku, and Aku will continue with financials. Aku, please.
Thank you, Kari. Let's start with recapping the group level quarterly net sales and operational EBIT performance. As said, very strong growth continued during the quarter, 50% in net sales and operational EBIT grew by 38%. As seen from this graph, also the profitability has developed well during the past quarters. Visualizing a bit more the trend, how the business has been performing with the rolling twelve-month figures. Firstly on the left, net sales, also they're above 50% growth compared to the situation one year ago. Our new strategic financial target, growth of operational EBIT, 15% on an annual level.
40% rolling 12-month growth in operational EBIT exceeded that level clearly in the quarter. The main components from where the quarterly growth came from, and pretty much the same situation as in the past quarters. Roughly 50-50 from M&A side and from organic side. From the inorganic growth, Signal Solutions Nordic that we acquired in June this year impacted very much on the growth as well as Infradex during this year. Also, FMB that was acquired in September of last year. Also two months inorganic impact from that company. Moving on to business areas. First, electronics. Once again, adjusted for continued operations, so excluding the Russian figures totally.
Very good growth, quarter-on-quarter, 64% to EUR 17.3 million from EUR 10.5 million. That was supported basically by all units. As said, very much came from the inorganic side, especially from SSN and Infradex. Also the organic performance during Finnish operations was solid and strong. Improved performance overall in the units. Also, the order book has still remained on a very good level and at the moment, we don't see any changes in the outlook there. Just to mention, also from Q2 that our subsidiary, Milcon, is also benefiting on the increased demand among the defense industry customers.
Baltic operations, despite very high uncertainty during the past half year, still performing stably and above our expectations that we had in the beginning of the year. From the development side, comment that integration of SSN has been performing well and proceeded well during the year. Technical Trade side, as shown in the graph, also there good growth of 20% quarter on quarter with very good profitability level despite the fact that especially in machinery, machining, metal machining business, we have had challenges during the year because of the uncertain environment.
In the power business of machinery, very good result, again in the quarter, supported by the generator business which has been benefiting from the energy price environment and demand, especially in the auxiliary power business side. But also from our OEM customers, the demand has been very good level during the past months. In construction business, Muottikolmio and Machinery's construction equipment business also solid and stable performance. There are uncertainties in the construction industry overall in Finland, but we see still reasonable outlook for the near future.
Pronius, acquired in the H1 of the year, has performed strongly and definitely offsetting some of the challenges in the business area and supported our performance very well during the year. Then heavy machines very strong growth were almost doubled quarter-on-quarter compared to last year Q3. However, as Kari mentioned, the performance and the profitability has not been in the satisfactory level, and we are currently working on the performance improvement actions throughout the businesses. Well, in Putzmeister business, better than expected performance during the quarter.
However, still the delivery times are long and there are uncertainties in the supply chain as has been the case during the past year or so. Sany business definitely not performing with our expectations. Weak profitability and diluting the business area overall. Especially in Finland and Sweden, this has been the case, but in Estonia performance has been according to expectations. From FNB side, good performance, but here also the supply chain challenges, especially in the chassis deliveries and supplies is limiting the delivery capacity at the moment.
Finally, as mentioned, after the review period, FNB acquired Lackmästar'n which then will expand the offering overall of FNB towards customers. Finally, our other operations where we have our logistics businesses, ESKP and Vesterbacka Transport, as seen from the bars, very stable, good performance over the quarter and on a good EBIT margin level also. There we have stable outlook also despite the inflationary environment, especially from the fuel prices and so forth. Moving back to the group level figures. Our new strategic financial target return on capital employed stood at a 10.8% level.
That has been now very much impacted on the hybrid issue in the Q1, pushing up the capital employed levels as seen here, EUR 7 million increase from the previous quarter. From that side, the return on capital employed staying in the past quarter level is good performance. On the other hand, on the return on equity side, improvement from the previous quarter driven by the good net profit development. Here also, as we can see from the bars, the absolute amount of equity has been increasing now heavily during the past quarter, especially due to the hybrid bond issue in February this year.
Our third strategic financial target, leverage target of range between two-three. Again, we landed on the middle range, on 2.55x level. Good and solid performance. On the equity ratio side, slight improvement from the past or from the previous quarter, driven by the good profitability and good performance in the quarter. Finally on the left, earnings per share. Gray bars are operational earnings per share. Improvement of nearly 20% compared to last year's Q3, despite the fact that now we have during this year also accounted the hybrid interest impact on the EPS side.
Very important KPI for us, cash flow. As mentioned, we are now more and more focusing on the cash flow and the capital allocation and the efficiency of capital. EUR 0.8 million operative cash flow during the month, diluted by the working capital increase in the month. However, has to be noted that there is EUR 1.6 million decrease now during the quarter from the inventory level. That will be on a heavy focus going forward. I think that was all from my side and then we can move on to Q&A side.
Thank you, Aku. Thank you, Aku, and bear with us a second. We will try and do our best with regard to getting the technology to work. We have a good amount of questions. Thank you for those. There are a few easy ones. I take first, and then we go into further detail. First of all, a question, what does the acquisition pipeline look like now? I think I already commented that during my presentation. It looks good. It looks strong.
What I like about it is also that it comprises of good quality companies that fit to first of all our business areas, but also also there's a good amount of entrepreneurs who feel to be enthusiastic on what we do and motivated to join the group. When it comes to the business areas, I would comment that majority or most majority of the deals are currently at the Electronics and Technical Trade business area sides. Also in other operations where we expect to continue growing via acquisitions.
Whereas in the heavy machine side, our focus is rather on currently focusing and getting us back on track with regards to underlying business and profitability. Also, there we have a good amount of new opportunities, but rather in the short term to complement our technical trade, electronics and other operations through M&A. I think there were a couple of other quicker ones with regards to M&A. There was a question: Could you please clarify the term workshop extension used as part of the technical trade business area commentary? So that refers to the GT Motor acquisition that we did in May this year.
May this year, coupled with the acquisition, we extended the workshop that we have here at our headquarters that is for machinery, power and construction business. That workshop extension has been completed and the GT Motor business has been transferred into this physical location. That is the reason for that. We expect that to contribute positively into the offering of our machinery power business unit and increase capabilities as we communicated when we executed the transaction. We have a bunch of questions with regards to business performance. If we start from below. First of all, on electronics business areas, could you open factors behind the strong growth of electronics business area?
Aku, I think.
Yeah, I think that also came in the presentation, but the main driver there has been the inorganic growth, the M&A side and from SSN and from Infradex, compared to Q3 last year. As said, also the organic business, especially in Finland, has performed well and been growing. The material part of that come from the inorganic side.
Definitely the new companies acquired into the electronics business area have started to perform strongly, SSN and Infradex. The LED-systems deal, the smaller deal that Led-Systems Oy did as an add-on to that, is also already completed now and expected to contribute to our numbers now going forward as well. But positive developments overall there. If we take the questions on heavy machines business area next. There we go. So the question goes: You showed how heavy machines business area is lagging a bit. Can you say some more about time window when we will see change here? And is the lagging, let's say, due to components availability issue?
To comment on this, I would say, first of all, the backbone of the heavy machines business area, Putzmeister business has performed well, better than we expected in Estonia. The ramp-up has been extremely good. The Finnish performance has been somewhat slower compared to previous years, but not dramatically. Whereas in Sweden, we have had a bit more profitability issues. However, there the order books remain rather strong. Yes, the delivery times continue to be extremely long compared to what they have been.
Overall, we are confident on our ability to bring the Putzmeister business back towards on the track where they have been and with regards to Estonia as a whole. If you look at the whole of all the Putzmeister business, it's been doing rather well. FMB business has also been significantly impacted by the delivery times. We have a strong order book going into 2024 already. It's more about in the next year, the focus is about getting mounted trucks out from the factory and getting that to work.
We are confident on that as well, and the outlook overall impacted by the forest industry sector development as well is rather positive. Where we have clearly more issues is on the excavator side. We have, as Aku mentioned, struggled with our Sany business and there clearly the growth track and especially the profitability track has not been what we expect that to be. We are working, as already said, hard with the team to come out with solutions that will over time improve our performance. I think that with regards to timing, it will take time.
I think we will start to see positive developments out of these initiatives as well. I would say in the H1 of next year. I think we had also another heavy machines business area question here. Do you expect price increases to compensate inflation going into next year? Yes. I mean, first of all, there's been a lot of price increases. Again, good to remember that we are selling in this category machines worth hundreds of thousands of euros. So there the price increases overall have been extremely high. We have been able to defend our margins rather well. Especially when it comes to new machines.
We have had some more issues on the service side of things. We expect this trend to be rather going forward on the positive rather than the negative side. There's a question on order, couple of maybe on the group side. First of all, how do the order books look like by business areas? Aku, would you like to comment that?
We don't have any group level figure here, but as mentioned during the business area presentation, in electronics side, order book is still on a high level and has been developing well, and we don't at the moment see any kind of material changes in the outlook, in the near-term outlook at least. Also from the heavy machine side, the order book is on a healthy level as well as in technical trade, driven by the demand in Pronius and machinery's power business especially.
Yeah. Maybe we continue thereafter directly to one last question on Technical Trade side. Could you please comment on the development of Technical Trade business area a bit more detail? To what extent was the growth of operating profitability driven by Pronius?
I would say that the Pronius performance during the year has been strong and has been supporting the profitability of the Technical Trade business area well. There has been challenges, as mentioned, especially in the Machinery's metal machine business. We could say that Pronius impact is offsetting that negative from the metal machine business. On the other hand, Muottikolmio is performing very much according to expectations and in line with last year and the Q3 of last year, whereas power business in Machinery's is performing well.
To complement the construction equipment business part of Machinery also.
Exactly.
Yes. Group level questions. Your operational EBIT margin improved from H1. Do you see this trend continuing also going forward? I think as we already communicated during the capital markets day, our ambition is to gear the financial profile, so meaning profitability, I mean meaning with that profitability profile of the company upwards, by directing our M&A doings towards businesses which already operate with good margins, but also improving the profitability of our existing portfolio companies. I believe that we have the measures to do this, and expect this trend to continue, let's say at least on a midterm perspective.
Of course, if the world is in a totally dark place, we will be impacted by that as well. As commented before, we look towards the future quite confidently. We operate and we own small companies, rather small businesses, that we have a lot to do and an impact also, and the leaders and the key people have quite a bit of influence on how we're operating. Overall, the trend clearly is where we aim to go, and I'm confident that we over time get there as well. With regards to working capital, there is a question that we are taking measures with regards to working capital development.
How many quarters normalizing of extra stocks will approximately take in your today's estimate? I would not go and comment the exact as well. I unfortunately don't have a crystal ball in my hand. I think that this is work we are currently focusing on. I think we have slightly too much of working capital tied into the business at the moment, compared to where we have also been in the future in the history. This is work that we will continue now, of course, on a longer term basis, but there is in the next six-12 months, definitely six-nine months, definitely where to go.
This is roughly the timeline I would expect that we continue to see maybe more of a one-time impact there. Still a few one-offs. Can you give any color on what is the impact of prices on organic growth? This is a difficult one. We don't measure it exactly in that way. I would not go and comment that at this point.
Exactly. The situation differs very much between the business areas and business units. Giving kind of general answer is very difficult here.
There's another question also that could you discuss how much did the supply chain problems affect your net sales? Were the effects different compared to previous quarters? I would say that compared to previous quarters, this has not affected a lot. From our point of view, I mean, if you look at the two years, the allocation situation, component shortage that started somewhere in Q4 2020, there was a significant upward trend right away with regards to delivery times and also order books going up and so forth. Thereafter, it has been rather stable during the last 12 months, I would say. Yes, our order books are, on a general level, higher than they have been, but the delivery times are also longer.
We haven't started to see, let's say, the deterioration of our order books compared to where they went, let's say, starting from Q4 2020 onwards. There are two remaining questions. First of all, a smaller one. Financial income was at EUR 4.5 million in Q3. What was the main driver?
Yes. The main driver was the hedging gain from our interest hedge in the beginning of the year. That was the quarterly impact on that one due to the heavy increase in the interest rate levels.
Good. The final question, given your leverage position, how much do you see M&A firepower in the near term? A good question. I think overall when it comes to our financial standing, of course, during these times, when uncertainty is there, we are, let's say, rather careful with regards to leveraging the company and want to be in a position that when the time is right, we have the ability to do M&A. You know that we have facilities available to buy new companies given the leverage, given the valuation levels where we operate also.
I believe that M&A can be done without significantly further leveraging the company. We have room to do transactions and of course quarter to quarter we continue to generate cash flow and use in a way deleverage the company that way and giving more room to go. It is a lot dependent on what the deals are there. We have enough firepower to reach our strategic targets. If we have a lot more to deploy, of course we, as already communicated before, are also available or ready to think about capital structure developments as well.
To summarize, I would say the current balance sheet provides a good runway and continuing runway to buy companies that fit the Boreo family as well. Okay. That was a good set of questions. Thank you for that, and thank you for participation. Took a bit more time we thought, but appreciate being there. With that said, thank you, and see you next time.
Thank you.