Borgestad ASA (BOR) Earnings Call Transcript & Summary

On behalf of Arctic Securities, I welcome Borgestad to this Q1 presentation. With us from the company, we have CEO, Pal Feen Larsen; and we also have Head of M&A, Bendik Persch Andersen. [Operator Instructions] And I'll give the word to Pal and Bendik.

Thank you very much, and thank you for the invitation. Let's go to some highlights. Borgestad released the first quarter this morning. And for sure, it's a weaker quarter than last year due to lower activity within Höganäs Borgestad in low season. Bendik will elaborate more later, but Höganäs Borgestad has a slower start of the year mainly within the Service and Installation business in the Swedish market. When we look at order book for second quarter and the rest of the year for Höganäs Borgestad, it looks healthy and the prospects look good. Borgestad do not foresee a general slowdown for the refractory market in the Nordics, but are optimistic on the rest of the year for Höganäs Borgestad. It's very good to see Agora Bytom is continuing its good momentum in the quarter and report higher revenue and EBITDA than the same quarter last year. Borgestad is an industrial investment company, focused on real estate and refractory aiming to expand into niche segments in the future. And Borgestad has initiated some key tools that we are driving the company for to review the success. One of them is to have the right team. And 1st of April, it was done a material change. Bendik took then the role as CEO of Höganäs Borgestad Group. And we can already see that he has implemented changes and has worked with the team that we will see success going forward for Höganäs Borgestad. After Bendik has joined Höganäs Borgestad, Borgestad will also need to strengthen the team. And from beginning of June, we have hired an investment manager, [indiscernible] that will join Borgestad and take part of the role that Bendik has had until -- before April. We're looking forward to have [indiscernible] onboard. Our portfolio includes a shopping center Agora Bytom and refractory company, Höganäs Borgestad, both dominant in the respective markets. Agora Bytom is a shopping center in Poland and is the largest investment of the group. Agora is centrally located in the Silesian region of Poland and holds a strong market position in its primary catchment area. Borgestad owns 100% of the shares of the company and the center. Höganäs Borgestad is a manufacturer and supplier of refractory quality products, installation and solutions that are essential for industrial high-temperature processes. Höganäs Borgestad is the market leader in the Nordic refractory market, and Borgestad owns 69.7% of that shares. Let's go into the details and start with Agora Bytom. For first quarter, the rental income is relatively stable. That is due to tenant changes in first quarter, and we'll see increase going forward. EBITDA increased due to cost cuts implemented in 2024. And as communicated before, we will -- we have seen the full effect from first quarter 2025 and onwards. If we look at the future, Borgestad expect that revenue and EBITDA will increase going forward. Debt towards Bank Pekao with due date at 31 of December 2028 stands at EUR 29.3 million at the end of first quarter. That is a loan-to-value below 50% and at a sustainable level. If we look into turnover among tenants, those are down 2.8% in the quarter, and this can be seen as a seasonal flotation due to timing, mainly timing of Easter. Easter in '24 was in first quarter, while in 2025, it was in second quarter in April. Easter in Poland has historically been a good period for shopping and turnovers in Agora Bytom. And it's important to understand that Easter in Poland has less days closed for shopping center than in the Norwegian market. So this will affect going forward for second quarter. Agora Bytom keeps a steady high WAULT both years and income. As communicated several times, our normal contract length in the shopping centers is around 5 years, so a WAULT of almost 4 is in the high end. 5% of the contracts has -- are ending in 2025, several with option to renew. The main part of the contracts will be renewed in -- as Agora is reviewing the situation at the moment. Historically, the renewals and strategy for renewal has been a good story for Agora Bytom, and we are confident that this will be the same for this year. Agora Bytom continue to develop a strong position in the local market and increase the occupancy in the quarter. Occupancy stands at 95.8% based on signed leases end of first quarter. Borgestad expect further increase in occupancy based on signed leases and several -- based on several ongoing advanced negotiations. Agora Bytom is in advanced negotiations of above 2,400 square meters. The negotiations are a combination of renewals of existing leases and new leases. If all negotiations will be signed, occupancy can be expected to increase up towards 97% to 98% within next 3 to 6 months based on signed leases. Agora has a good momentum in the rental market and management are working to capitalize the momentum into rental income. With occupancy rate above 95%, Agora -- at Agora Bytom, we expect for further increase going forward. And as a natural consequence, it's hard to find available units in Agora Bytom. If we need to -- if we have tenants, we need to then change to optimize. And the strategy going forward is to increase the rent per square meter and work to optimize the puzzle in the center. That is a strategy that Borgestad is confident that will be implemented in Agora due to our local management that is incentivized to do and complete that puzzle and work with it every day. Let's go in to Höganäs Borgestad and over to Bendik.

Thank you, Pal. Let me start with the Q1 results before moving on to our outlook ahead. And I will also provide an update on the previously announced sale-leaseback agreement in Sweden. As shown in the chart to the right, we saw a revenue drop of 8.8% for first quarter this year compared to the same quarter last year, ending at NOK 186 million. And as we do have a relatively high operational leverage with a lot of fixed cost, we are obviously quite dependent on sufficient revenue each month to reach breakeven and during Q1 this year, which is always our weakest quarter as a consequence of low maintenance during the winter in the Nordic refractory markets. We recorded an adjusted EBIT of minus NOK 11.5 million, about NOK 9.5 million behind last year's performance. If you look at the year overall, we see that historically and generally Q1 and Q4 are weak quarters for the Nordic refractory markets. And that goes for us as well largely due to the cold weather, where a lot of industries are prohibited from -- to make maintenance and as the chart shows activity typically picks up during the spring and peaks in July, August, where a lot of planned maintenance is scheduled during the summer holiday. But as the bottom chart shows, we delivered a weaker first quarter this year compared to previous years, as Pal mentioned in the intro. That's due to lower activity in the Swedish subsidiaries, whereas the Norwegian and the Finnish subsidiaries are continuing to perform well also in Q1. We do not view this weak first quarter as a sign of a broader slowdown or a general setback in the positive momentum we have seen in the last few years. But we are obviously not satisfied with the first quarter this year, and we are working hard to ensure that we will increase our revenues for next year's Q1. In addition to that, we are also implementing cost-cutting measures to reduce our operational leverage for the quarters and years ahead. Looking at our trailing 12 months performance. The weaker Q1 reduced our average EBIT margin from 7.5% in full year 2024 to 6.7% as of Q1 2025. But as I said earlier, we did not view this downturn as dramatic. We have good prospects for the remainder of '25 and also what we see shaping up in 2026. But of course, it's natural to ask whether this downturn is might be linked to a broadly broader -- let's call it, macroeconomic environment with trade tensions and more uncertainty. And we do observe some slowdown in certain industries with especially some larger projects being postponed. And we also note that other refractory actors have reported a weaker Q1 this year. But as the history has shown, the installation business in our refractory business is quite resilient to market fluctuations and rather steady. But we are, of course, monitoring the market closely, and we'll assess whether we should implement further actions to reduce costs ahead of next year's low season. Finally, a brief update on the sale leaseback agreement in Bjuv as announced in late 2023, we agreed on the sale of our 2 properties in Bjuv to the local municipality with an option to lease them back for another 5 years, after which we will relocate our own production. Following this announcement in 2023, a local citizen in the municipality submitted a complaint claiming that the agreed price was too high. And in March this year, the Administrative Court in Malmö reviewed the complaint and ruled against the completion of the transaction, citing insufficient documentation to support the valuation. The municipality has now in April, appealed the ruling and submitted additional documentation supporting the valuation. And we expect initial feedback on whether the appeal will be reviewed now before the summer. And if it is, then the communicated processing time is 9 to 10 months, meaning that we should have a final feedback on the case by the end of this year or early 2026. And from our side, we still expect the transaction to go through and as planned. And any updates will, of course, be announced as soon as possible.

Thank you, Bendik. Let's go into the financials and sum up at the end of the presentation. Borgestad Group has not started the year as in 2024 due to slower start of Höganäs Borgestad, reporting a revenue of NOK 206.5 million and EBIT of negative NOK 11 million. Net financials are also negative affected due to increased costs in first quarter 2025. The increased cost is due to that Agora Bytom in first quarter 2024 had the old interest hedging on very favorable terms. For those who remember good, a new interest hedging was in place from third quarter '24 and onwards. Profit before tax ends up at negatively NOK 23 million. And let's look into the balance sheet. Borgestad has a strong balance sheet with a sustainable debt level and a good cash situation. Net interest-bearing debt at NOK 249 million at the end of first quarter. Debt towards Nordea for Höganäs Borgestad is due 30th of June this year. We have a good communication and process with Nordea for refinancing and expect to close a new financing or refinancing through June or probably mid of June this year. Inventory is increasing in the period as we are entering into high season for installation and maintenance business for the whole Nordics. The property in Bjuv stays as held-for-sale until positions received related to the complaint that Bendik talked about previously. Looking at the cash flow statement. Net cash from operating activities is negative, mainly due to negative results in the quarter and the increased inventory. Debt decreased according to amortization plan, and Borgestad holds a good cash situation at the end of the quarter. If you look on the outlook, Borgestad is optimistic for the remaining part of the year. The order book and prospects for Höganäs Borgestad looks good and Höganäs Borgestad implement activities to secure lower cost base going forward and focus on order log for low season already at this stage. Agora Bytom has a good momentum and Borgestad expect occupancy to increase, including increased revenue and EBITDA going forward. Thank you.

Thank you very much, Pal. And thank you, Bendik. [Operator Instructions] We have a few questions, and I can start regarding the real estate property in Sweden, in Bjuv, that you mentioned, Bendik. So was a question from one of the listeners regarding the values, I mean, because you have 2 different valuations on the property. And the question is related to if those valuations are in line with the sale price that has been negotiated or if it's higher or lower?

Borgestad had compared valuation -- completed the valuation in 2022 for the 2 properties in Bjuv. And those valuations are then based on, of course, the interest and market rates at that moment. Those 2 valuations are in line with the transaction price that we have agreed with Bjuv. Bjuv Municipality has also order external valuation, and that valuation is also on or in line with the transaction value. So I would say it's at the same value.

That's also, as we say, that the reason for why we are expecting the transaction to go through because now there are multiple valuations supporting the negotiated price.

Yes. And then to Höganäs Borgestad. You mentioned the cost-cutting measures. Can you provide any more specific details on...

We are outlining the details now. We have a lot of rent, which we will -- which we are looking at and also, of course, other parts of the cost base. And it's about finding the balance between having sufficient say, a sufficient base for the high season, while reducing the cost as much as possible during the low season. So we need to find the optimal balance there. But we are looking at it, and we'll be implementing it in the months ahead.

Good to know. And of course, if you follow the company for a while, you know all about the seasonalities. So it will be interesting to look at Q2 going forward. And in Agora, in the -- I think it was a Q3 or Q4 report, it was mentioned that the parking facility could be converted into a consumer store for groceries. So yes, any new developments on that?

We are still working on it. The prospects looks good and the financials also looks good. What we are working on is local permissions, et cetera, and of course, negotiations with potential tenants. I would say that the time line is a bit extended, but I expect that we have a final communication by the end of the year, if it's possible or not.

That was the questions that were asked in the Q&A chat. If you have any additional questions, please feel free to reach out to Arctic or to management directly. Yes, I think that's good. Thank you very much for a good presentation. And looking forward to the rest of the year.

Thank you.