Good morning from Vantaa, from the Boreo headquarters. Welcome to this webcast where myself, Kari Nerg, CEO of the company, and our CFO, Aku, will discuss the Q1 2023 highlights of the firm. Agenda briefly. First I'll recap the key strategic and financial highlights of Q1. Aku will discuss the group level financial performance as well as the business area performance in more detail. We will take questions that the audience has presented during the webcast. Please use the webcast function that is there in the platform made available if you have any questions. Starting off with the highlights. Looking at briefly the quarter.
Summarized it was a strong, I mean, strong and expected. The performance was expected as well as we went into the quarter. Pleased to see that our operational performance measured by operational EBIT grew by 81% during the quarter. EUR 2.1 million operational EBIT. Also, the margin improved from the previous year from 3.6% to 5.1%. Mainly, the both the performance was supported both by the rather good organic growth in the businesses, but also the acquisitions that we have done during the year, which were not the companies which were not part of the group in Q1 2022.
We have put a lot of focus on improving our capital efficiency, educating, training our companies, rooting the mindset in the firm in order to ensure it's not only positive earnings development, but also improved characteristics when it comes to returns on capital. We have been now in the quarter compared to end of Q4 2022, our Return on Capital Employed improved from 10.4% to 11.3%. So a significant uplift mainly due to the positive earnings growth that we experienced during the quarter.
If we look at cash conversions, operative cash conversion in the quarter, one of the new key KPIs and metrics that we have started to report, it was at the level of 35%, rolling twelve-month basis, 44%. Basically indicates that we tied up a bit of working capital mainly due to seasonality reasons in Q1. Also as we, as mentioned there in the slide, we did not yet experience the positive cash flow impact from the Sany exit that we have communicated during Q1. Expect to see some positive cash flow one time natured in Q2 2023 then.
Leverage continues to be stable in the middle of our strategic target range, and we also proceeded quite actively in when it comes to more on the strategic execution side. Welcome to two new companies to the group and also the Sany exit was a significant milestone for our heavy machines business area. If we look at then a bit of more the trend trend performance with regards to our key financial metrics. You see on the left-hand side in the slide, the operational EBIT development since Q1 2021, so on a rolling twelve-month basis.
There we have significantly improved the earnings profile of the firm from, I mean, absolute terms from EUR 3.9 million to EUR 9.6 million now at the end of the quarter. We have slightly improved the margins on the group level when it comes to profitability. However, if you look at this 5.7% level where we are, this is far away from where we want to be in the longer run. If you look at the last 2-3 years, basically, this result is a result of our underlying operations performing better than before.
Experiencing organic growth in the companies that we have owned and then the let's say investments into the group side, close to EUR 2 million that we have put in, are deteriorating the margins roughly by 1%-1.5% on a group level. Once the company grows, we expect also the growth to come in with better rates. Return on Capital Employed, as mentioned, improved now from the year-end. We are working hard to with the team and the companies to improve this profile. This portfolio of companies which we own today has the ability to generate better returns on capital.
We expect to see in the course of this year and the years to come a gradually improving performance on that front. Then when it comes to our net debt to leverage position, financial standing in a way, we have been, as you see from the graph, we've been running the firm pretty much in the middle of the strategic target range, measured by net debt to operational EBITDA, and intend to do so in the future as well. We have enough liquidity available to run the, let's say, running operations of the firm, and then also supported by the acquisition facilities we have still unused available.
We have the ability to continue acquiring new companies as well. I think quite an interesting slide, I believe for listeners this time. We have started now from Q1 2023 to report, let's say a couple of new metrics. The cash conversion, which I mentioned, also a Return on Trade Working Capital at business area level. In this graph, you see the both the Operational EBIT trending performance in the last 15 months, but also the Return on Trade Working Capital KPI development. This is of course. I mean, this...
a firm that can be called an asset-light natured, so the majority of the balance sheet that we have is pretty much comprised of working capital. So when driving this, driving the performance of this metric also, the returns on the group level, let's say, move in accordance with that, with that, and with that metric as well. So if we look at this, we have been on a group level on the left-hand side, rather stable in the last 15 months. However, now seeing a trend-wise positive development there
The electronics and technical trade businesses have been operating at rather stable levels in the last year, whereas the heavy machines business area has had difficulties, and we expect in particular the exit of Sany to contribute positively to this, to the development of the return profile of the business area as well. Continuing a bit more on the strategic side. First of all, we continue to do what we are supposed to do and what our strategy and long-term strategic targets say. We acquired and welcomed two new companies to the group in Q1. In January, acquired a company called Filterit to our technical trade business area. A great entrepreneurial business that is mainly exposed to the process industry in Finland.
High levels of profitability, long-term, steady track of profitable growth and high returns on capital. Pretty much a type of the companies that we want to be continuing to acquire in the future as well. Muottikolmio, one of our companies as part of the technical trade business area, also made an add-on acquisition during the quarter. Acquired a company called Lamox. Very similar type of a profile. A strong business with product ownership, a strong, high gross margins, high profitability and returns on capital as well.
Overall, in line with the transactions that we completed in year 2022, we look to and we continue to acquire companies which positively contribute to the financial profile of the firm and makes the group as a whole, more resilient. Secondly, then, with regards to development side of things, overall in the group, I mean, we're still in very early days of the whole journey of the firm. We continue to have work to do in order to develop the ways of working, to rooting the mindset of how we want our companies to operate, What are the key metrics with regards to financial and other operative KPIs that are important in the long run.
Because of that, we continue to work with concepts like the Boreo Way, and also driving the Game Plan concepts that we have put in place in order to make sure that once the company grows, it has sufficient level of governance in place and sufficient amount of similar type of mindset throughout the firm, that we continue to move to a common direction in the longer run as well. Important topics with which we need to be, of course, continuing to work continuously in the future, but especially in these first years of the development journey. We have put a lot of focus or increased the amount of focus and resources into sustainability themes.
During the quarter, we have spent time in discussing, brainstorming, and also training our key employees with regard to sustainability topics. Also trying to do our best to identify the possibilities on how we can continue or how we can improve the long-term prospects for our businesses to perform well in the future by taking sustainability more into focus in developing the companies. In the roadmap that we have put in place in 2022, we continue to work towards being ready to report for the first time on sustainability topics in year 2024. These are more the strategic side of developments. Last...
My last slide, and then I will turn on to Aku for financial review. We have already talked about the exit of the Sany operations in Finland and Sweden during Q1 and in the Q4 release as well. I won't be spending too much time on this, but nevertheless, I think it's an important topic, A, from the point of view of its positive contribution to the group financial metrics. B, also, because of the resource allocation mindset that we continue to develop and try to get better. Basically meaning that the great resources we have in the heavy machines business area available.
I strongly believe that we are able to perform better and generate better long-term business elsewhere than in these two businesses. Thirdly, it also sends a certain message of our ability to look into mistakes and challenges that we have and take action when we feel that we're not a long-term, the best long-term owner for these type of businesses. Sany, I believe, will have very bright future in these countries. A strong supplier, one of the leading brands in the world. We continue to do our best to support the transition to new dealership structures in these markets as well.
thirdly, I think, let's say a point to bring up is that Putzmeister is the bulk of our heavy machines business area. Putzmeister is a traditional long-term, long-standing European brand, in the concrete, pumping world, that is owned by the Sany Group as well. Sany relationship overall and Putzmeister really important for the group in the long run. We've had our difficulties due to mainly due to market conditions in the last couple of years, but we are I believe we are nicely on track to bring the Putzmeister business back on track again. Basically, from...
I think this overall is a topic that shows that we are able and capable of doing things and looking at the portfolio in a manner that it serves the interest of our shareholders in the long run. Summarizing the impacts of this exercise, I mean, we took a EUR 0.3 million write-off to our books in Q4 result already. You see in this, in the Q1 report a EUR 0.2 million positive impact because of this exercise. Basically a conversation that was agreed with Sany in connection with this. The cash flow impact is not yet visible on Q1, in Q1 numbers, but will be there in Q2 then as well, so contributing then to improved capital efficiency as well.
With that said, I will turn the floor and give the floor to Aku to continue.
Yes. Good morning also from my behalf. Thank you, Kari. Let's walk through the financials from Q1 and the group level and also on the business areas. A bit repetition here, but good to mention rolling 12-month sales growth continued with a bit over 30% growth compared to the year ago. Just to mention that now the rolling 12-month sales hit EUR 170 million for the first time. Of course, we have quite recent acquisitions there, supporting this figure already in Q1. This is of course expected to continue still as kind of pro forma basis when the new companies are fully on board on a yearly basis.
Operational EBIT also improved nicely to EUR 9.6 million from EUR 7.1 a year ago. 36% increase there, which clearly exceeds our strategic target of over 15% growth per annum. Once again, quarterly figures. Sales grew by 29% and operational EBIT by 81%, meaning that our profitability also improved as shown here on the right-hand side line. Components of the net sales growth now in Q1. Again, it was a good mix of both inorganic growth and organic growth, especially now acquisitions from the previous year, Pronius, SSN and Infradex acquisitions, but also the Filterit and J-Matic acquisitions now in Q1 supported the inorganic growth.
Inorganic side then especially electronics, and also heavy machines contributed on growth. Same bridge graph from EBIT side. Almost same structure here as in the previous slide. A bit higher share of inorganic EBIT growth as compared to the organic one. Moving on to business areas. First electronics. Solid and good performance overall. Over 20% growth in sales. Operational EBIT margin a bit decreased from the Q1 2022, mainly because of two subsidiaries, SSN and Milcon. There we have a timing of deliveries in Q1, which impacted on the performance. However, in other subsidiaries in Finland, Noretron, YE, very good and solid performance, as well as in Infradex and also in Baltic.
Baltic operations, better performance than expected in the first quarter. Now we have also in these business area slides a new component on the right-hand side bottom graph. Rolling 12-month Operational EBIT and Return on Trade Working Capital. As Kari mentioned, very important metric for us to drive and follow operatively the capital efficiency. Here we can see that in electronics, rolling 12-month Operational EBIT also nicely grew and Return on Trade Working Capital quite solid on a 44% level. Technical trade side. As mentioned, we made several acquisitions during the year. These acquisitions, Pronius, J-Matic and Filterit, nicely supported the performance of the business area. 8.8% EBIT margin, clearly above the last year's.
There, especially the acquisitions was the supporting factor or the driver. Looking the businesses in machinery, power business still had very good and solid Q1, although a bit below the very high and good performance in Q1 2022. In construction businesses, Muottikolmio and in machinery construction equipment also performance according to expectations. We know that the construction market overall is soft at the moment. Of course that a bit also impacts our performance there. In metal machines side, in machinery, still investment uncertainty impacts on the performance. However, in Pronius, very good performance in Q1.
As mentioned, J-Matic and Filterit, good start in Q1 as part of the group. Moving on to heavy machines. Here also, good numbers on a quarterly basis. Growth of roughly 30%. Yes, a bit improved EBIT margin also. As Kari mentioned, there is a one-off compensation which positively impacted on the quarterly EBIT margin. The highlight of the quarter definitely is the Sany exit operations and actions which are proceeding according to plan. Still in the Putzmeister business, quarterly timing of deliveries impacted on the figures. Same comment as we had in Q4 last year regarding FNB.
There are still issues in supply chain and material availability, which limit then our capability for delivering the products to customers. Return on Trade Working Capital, as mentioned, a bit improvement there from the end of last year. Definitely we are not there where we expect the business to be in the mid and longer run. Finally, other operations. Here we have our logistic operations together with our group costs and the graph here on the right that shows now the operative company's performance. Again, EUR 1.2 million net sales in the quarter as seen here, very stable compared to the previous quarters.
Also profitability, quite stable, clearly ahead of Q4 2022 and quite in the same level than in the previous quarters, despite of the fact that we have very inflationary environment still in the business. Moving back to group level figures. Very important two graphs here. KPIs, Return on Capital Employed on the left-hand side, clear and good improvement from the end of last year, which is definitely one of the highlights of this Q1. Also two components there, improved rolling 12-month EBIT, improved earnings, together with stabilized capital employed development. We stated throughout the last year, our capital employed has been increasing very fast during the previous year, mainly because of the EUR 20 million hybrid bond that was issued in the beginning of 2022.
Now in rolling 12-month terms, of course, we have the full impact of that included in the capital employed side, which also partly supports the Return on Capital Employed %. Return on equity also, slight improvement from the end of last year. Leverage, as mentioned, I will mention this one once again. On a good level, stable level, slight increase from the end of last year. Two factors, acquisitions, but also debt service actions that we did in the first quarter. New graph, new metrics, cash conversion, here on the right-hand side. The blue bar is rolling 12-month operative cash flow, and cash conversion also calculated on a rolling 12-month basis.
How much operational cash flow is from the EBITDA. We landed on 44% level here. Also that is not there where we aim it to be somewhere 70-80% level on a longer run is the target level. Then finally, earnings per share, 23% growth compared to Q1 2022. One thing should be mentioned here is still that this hybrid bond related interests are affecting on the comparability as mentioned in the bottom asterisks there. Going forward, towards Q2 and behind that, hybrid does not have any impact anymore. 23% improvement in EPS, without that impact, the growth would have been a bit over 30%.
Quarterly cash flow, on the right-hand side, EUR 0.8 million net operative cash flow in the quarter. Periodic impact from the working capital increase as the season is starting in, for example, in our construction businesses. That a bit impacted on the quarterly numbers. In Q2, as Kari mentioned, we expect positive impact from the Sany exit, as the working capital impact is fully positively expected to impact on the cash flow. EUR 3.9 million cash flow from investments in the quarter because of the two acquisitions that we made. Now we can proceed to Q&A. Thank you.
Thanks, Aku. Thank you for the questions. Questions that have been posted. I would have wanted to publish them here, I don't have the technical capability now to make them available for everyone. I'll try to sum them up in a couple of themes. First of all, starting with the capital efficiency related questions. There is one question that asks, "What is the working capital levels relative to sales we are aiming for with this portfolio companies that we own today?" I mean, I will comment that two ways.
I think the more important metric that we're looking at is the Return on Trade Working Capital KPI that now we are published now for the business areas for the first time. This is also the metric that is the core KPI in driving the portfolio and also which is tied to all of our incentives as well. I mean, considering where we are, close to third, roughly 30% at this point of time, we look to bring this, let's say at least to the levels of 50% in the midterm. That is more relevant.
When it comes to working, I mean, trade working capital compared to, or in relation to net sales, I believe we are running at the moment somewhere around 18%-20%.
Yeah.
I believe this portfolio of companies that we own today, we, let's say on a sustainable basis, it should be around about 50% the number that we've been looking at rather than closer to 20%. Also I would say cash flow or cash flow related questions or this Sany related topic. I think I clarified this already in the presentation, but I will restate that. How large is the positive cash flow impact we expect from Sany? That was roughly the EUR 2 million number that we expect to see in Q1. There is another question on Sany that was there a sales impact from during the quarter or of EUR 2 million as well? No, this was not the case.
There was, around about a half a million euro sales.
Yes
impact through Sany in Finland and Sweden in Q1 numbers. The compensation to EUR 200,000 we're talking about that is booked as a cost reversal into our books in Q1. no sales impact from that. Do we expect any costs or impacts of this exercise still going forward? Yes. We have sorted out pretty much everything we have in the stocks now. Some sales are due to still happen through auctions which are there. Not 100% clear visibility on what it would be, what it will be. Nevertheless, on the profit and loss statement side, we don't expect this to be anything material in Q2 or beyond.
Q2 that you will see some small things. We will comment that then in the next quarter. From Q3 onwards, we expect as of today to be in a way clear from those topics. If we move more to earnings side, there was a question on organic growth. Could you, Aku, open up a bit the background on from where that organic growth in the quarter, where did that come from?
Yes. Well, if you look at the sales first, organic growth came mainly from two business areas, electronics, especially the Baltic operations grew compared to Q1 2022 and then also heavy machine side. Of course their timing again of the deliveries impacted a lot on the organic growth side. That was the other division where the organic growth came from. Same pretty much goes with the earnings also. In Technical Trade, then more the inorganic growth impacted on the growth.
Yeah
... during the quarter.
Thank you. Then there was a few questions on Signal Solutions Nordic related postponements, reasons behind and how much do we expect this to take and so forth. I mean, first of all, the profit impact, we're talking about a few hundred thousand EUR of profit impact during compared to our own expectations of where it was. So clearly below the expectations from where we started the quarter. This is the reasoning behind is due to the couple of main customers halting some sales to our understanding for a temporary period of time.
We expect to recover majority of this, if not all, majority of these sales in the course of this year, this year or then in the course of the, let's say, the next 12 months or so. When that will exactly happen and this has started to roll out during Q2 already partially and will be then more visible, I believe, during the second half of 2023 as well. There was some financing, simple financing questions. Aku, maybe you could just note on hybrid bonds. How much hybrid bond interest cost for full year 2023 there will be?
Yeah, that is fixed 8% coupon in that hybrid bond. That will be EUR 1.6 million roughly. That was exactly also the amount that we paid hybrid bond interest during the Q1.
Okay. This question continues. No worries for sending this in couple of points. Hybrid, I mean hybrid bond, that was the hybrid bond cost. The EUR 1.6 million. What are the other debt service related costs and ultimately interest for the current debt portfolio at the moment for the year?
For the year? Well, now in the first quarter, the interest expenses were EUR 0.6 million compared to EUR 0.2 million in Q1 2022. That is two factors because mainly because of the interest level increase quite material one compared to a year ago. Of course our gross debt is also a bit different than it was last year. Turning that to the full year perspective, that will be somewhere EUR 2.5 million level, roughly interest expenses on a yearly basis.
Maybe remind the audience also on the actions we took on the hedging side last year.
Yes, exactly. Pretty much during this time of last year, we also hedged EUR 15 million of our current senior debt facilities with interest swap. Because of that, our kind of effective interest rate is kept a bit below the current kind of market levels. Roughly our effective interest rate level at the moment is somewhere on 5% level per annum.
Thank you. There is a question on let's say overall market outlooks and any changes now recently. I mean, I would comment that first of all on the group side, I mean, there has not been any material changes now during the, let's say last month or two. I mean, in my opinion, we're not living in an environment where you see that it will be a crazy year of growth, supported by positive market trends overall in the economy. That's not where we are. However, we're not either in a, from a demand point of view, we're not in a situation that we would see a dramatic shift downwards either.
I believe, in my opinion, we look at the business areas. I would note that there is maybe a slight softening of the environment as it has been during very strong times and demand environment from the electronic side in 2021, 2022. We continue to be on good levels. Compared to, let's say, last year, a slight drop downwards when it comes to the rest of the business areas. Nothing significant in my opinion. Technical Trade, I mean, we have a better diversified portfolio as we've had before. Construction related businesses both in Technical Trade side as well as in heavy machines business area.
Our then, our companies operate in mainly in such niches, where you would see that, although the market is for sure on an an aggregate level, coming down, we're not too worried about that situation although of course not unaffected totally. Generally, I mean, nothing dramatic in that sense. There is the usual question on order books, how solid are they and how long they are. I mean, we don't communicate the order books as you very well know. They are also very different in nature in the different businesses. We have, in a way, quite long order books on heavy machines business area side.
We have a strong order book, for example, in the machinery power business, where we have good visibility based on our OEM customer demand, for example. On the electronic side, if we look at the old Yleiselektroniikka businesses, the order books are. I mean, they continue to be on a significantly higher level than where they were in 2020, 2019, for example. They do not continue to go up by 100% as they did as they were going 1- 2 years back. Nothing dramatic. Impossible to give you an answer on what it all is on an aggregate level. No dramatic changes have occurred in the last quarter, I would say.
If you give me a sec, I think we have now touched upon the majority of the questions. The last question, maybe, Aku, you could comment this one. This is on salary inflation. What sort of salary inflation do we expect to see this year? And inflation in general also, overall in the business. OpEx operating costs, were they at normal level in Q1?
That also depends between countries. I would say, though, we have different inflation rates, for example, in Baltic countries than we have in Finland, for example. If we put some average salary inflation or inflation overall, I would talk some single digit inflation rate, maybe between 5%-10% would be the range roughly.
Good. There continues to be some questions I think I will finish off if no other questions are, I mean, on our M&A pipeline. I did comment that shortly in the course of the presentation that, I mean, we continue to work with the new acquisitions. There is the balance sheet supports some M&A we continue to do in line in order to achieve our strategic targets. We have focused the resources quite a lot in looking at great quality companies, such like you have seen us acquiring in the last 12-15 months. And also focusing quite a bit on the areas where we are active at the moment.
We've done a lot of proprietary sourcing work in order to generate such pipeline of companies, I mean, which includes businesses we want to buy, not only the ones that come out to the market from an opportunistic basis. We have a good pipeline, continuing good pipeline and I hope that in the course of this year, we continue to do M&A as well, as continuation for the two first transactions we completed this year. Looking to continue and maintain that track as well. Yes, still one question, and Aku, you can take this one. OpEx inflation, do we expect to be able to transfer this to sales prices?
Yes, that is our expectation. If you look at the gross margin development, for example, in the longer run or rolling 12-month basis, that has been very stable throughout the previous quarter. Yes, that is our aim.
Very good. Now 45 minutes is gone. Thank you for the audience. Thank you for the active participation to the webcast as well. I appreciate taking the time and very happy to be able to start the year in such a positive manner as we were able to do so. We continue to work hard and see you next time during summertime. Thank you.
Thank you.