Borgestad ASA (H460.F) Q2 FY2025 Earnings Call Transcript & Summary

Welcome to Borgestad's Q2 presentation. With me from the company, I have CEO, Pal Feen Larsen; and Head of M&A and Investor Relations, Bendik Andersen. [Operator Instructions] So with no further ado, I will hand over to Pal.

Thank you very much, and Borgestad released its first -- second quarter this morning. Let's go into the highlights. In second quarter '25, Borgestad Group delivered an adjusted result before tax of NOK 20.9 million. Agora continued its positive momentum, posting an EBITDA of NOK 12.1 million in second quarter, up from NOK 10.7 million in second quarter '24, a positive -- really positive development for Agora Bytom. Höganäs Borgestad delivered a weaker quarter compared to second quarter '24, reporting revenues of NOK 296.4 million compared to NOK 318 million last year. Adjusted EBITDA in the quarter was NOK 27.5 million, down from NOK 39.8 million last year. In the quarter, Höganäs Borgestad acquired 100% of Emcotech AB, a Sweden-based company specializing in industrial flue gas cleaning. Just it's okay to mention that Emcotech was acquired on last day of the quarter. So no P&L effect for the quarter is included in the quarter. But of course, from third quarter and onwards, we'll review Emcotech included in the P&L of the group. Höganäs Borgestad refinanced its existing loan facilities with the Nordea Bank, extending maturity date until June 30, 2028, on very good margins and a margin reduction of 0.8% compared to the last facility. Let's take an introduction to Borgestad. Borgestad is an industrial investment company focused on real estate and refractory, aiming to expand into niche segments in the future. Borgestad is strengthening its existing investments through operational improvements, and we want to expand into niche segments with consolidation potential. Going forward, we will leverage on the networks and expertise of management and the Board to unlock new opportunities for the company. We are using different tools. And for Borgestad, it is important to have the right team in place. We are looking for effective use of capital. We measure everything and develop KPIs for our investments and will be active in M&A. Borgestad's portfolio today includes the shopping center Agora Bytom and refractory company, Höganäs Borgestad, both dominant in the respective markets. Agora Bytom shopping center in Poland is the largest investment for Borgestad, accounting for over half of the balance sheet. Agora Bytom is centralized -- centrally located in the Silesian region of Poland and holds a strong market position in its primary catchment area. Höganäs Borgestad is a manufacturer and supplier of quality products -- refractory quality products, installations and solutions that are essential for industrial high-temperature processes exceeding 1,200 degrees in various industries such as steel and cement. Agora Bytom is owned 100% by Borgestad and Höganäs Borgestad Group is owned by 69.7% by Borgestad. Let's go into the details and start with Agora Bytom. Agora Bytom continued to deliver increased revenue and EBITDA in the quarter. We delivered margin improvements through revenue growth and cost reductions increased EBITDA from NOK 41.3 million for full year '24 up to NOK 43.5 million for last 12 months end of second quarter 2025. As of June 30, occupancy based on signed leases was at 94.8%, a decrease of 0.04% since March 31. As the date of the report, the estimated occupancy on signed leases stands at 96.6%. This is due to an active summer in relation to closing negotiations and signing new leases. Those leases will have a full effect from first quarter '26. The shops will open during fourth quarter '25, but will not have full effect in that quarter. In addition, Agora Bytom are in advanced negotiations with several tenants at the moment, and Agora estimates to close and to sign new leases in third and fourth quarter, increasing 2% -- or the leases will increase 2% of the leasable area and especially on plus 2 level will be improving during -- potentially improving during third and fourth quarter. So we have guided that at the end of the year, Agora Bytom will probably have an occupancy rate above 97% going out of the year. Agora Bytom has over recent period shown good development in increasing the occupancy rate and has now nearly fully leased out the center. With this strong occupancy as a foundation, the focus is shifting towards renegotiating or replacing low leases to increase the actual rent per square meter per month. At the same time, we'll continue to increase the center's commercial attractiveness. A combination of high occupancy, improved rent levels and increased attractiveness is critical for any potential value increase going forward. The Polish economy is developing good and this is also reviewed in the consumer confidence within Poland. It's also worth mentioning that Poland's reference interest rate was decreased to 5% as of July 2025. Agora Bytom has a diverse tenant base and a healthy weighted average unexpired lease term, ensuring low contract duration risk. As you see in this slide, the highly -- Agora has a highly diverse tenant base and top 10 tenants only contribute to 43% of leasable area. And this is an okay level and a low risk compared for the big leases. Contract duration is spread over time and renewal risk is low with 5% due in 2025 and 8% of leases due in 2026, it's a comfortable level and a low end of normal years related to contract renewals. So we are comfortable with the total situation for Agora Bytom. Let's move on to Höganäs Borgestad, and Bendik will take it from there.

Thank you, Pal. Let me start with the Q2 figures before moving on to how we see the remainder of the year and also 2026. I will also provide an update on the previously announced sale leaseback agreement in Bjuv. And finally, I will also provide some insights into our latest acquisition of Emcotech AB in Sweden announced in June. Looking at the second quarter figures, revenues declined by 7% in this year's second quarter compared to the same period last year, and our adjusted EBIT came in at NOK 21.8 million, down from NOK 33.3 million in the same quarter last year. This decline reflects both a general slowdown in the refractory market where we experienced both a higher degree of price sensitivity and also some projects being postponed until later in the year or even next -- even '26 or '27. We are, however, also experiencing some loss of market share in the Swedish market, which we are working actively to turn in the coming quarters. On a regional level, Norway and Finland continued to deliver strong results despite having less project activity with both subsidiaries delivering rolling 12 EBIT margins above 10%. While in Sweden, we are, as I said, still facing challenges with a high cost base and loss of market share. And all of our 3 Swedish subsidiaries are having a rolling 12 EBIT margin of about 2.5%. To address these challenges in Sweden, we have implemented cost-cutting measures, which will take effect from September. In addition, we are appointing new Managing Directors internally for both our production and installation companies in Sweden, also taking effect September 1. The current Managing Directors will transition into new roles as Sales Director being fully responsible for the sales in Sweden and Director of Strategy and Business Development. And we strongly believe that this will contribute positively going forward. As we have highlighted in previous presentation, the Nordic refractory market is highly seasonal with generally low activity during Q1 and also Q4, primarily due to cold weather, and activity typically picks up during Q2 and peaks in Q3 when a lot of our customers perform planned maintenance during or after the summer holiday. After a weak first quarter this year, the activity picked up in second quarter as expected, although it came in below our midterm target. For the quarter, we delivered an adjusted EBIT margin of 7.4%. I want to highlight that in general, we are not in favor of reporting adjusted figures. But in this case, we are adjusting for layoff compensations as part of the cost-cutting program in Sweden. We are also adjusting for a write-off of our ERP system in the Swedish installation company. It will not have any cash effect, and that's why we are also reporting adjusted figures to report on our core business. If we look at our trailing 12 months performance, the second quarter pulled our rolling 12 EBIT margin down from 6.7% after Q1 this year to 5.8% as of Q2. With this weak first half, we do not expect to exceed last year's performance of 7.5% for the full year, but we do expect a stronger second half and that we will continue with a positive development through 2026. And of course, it's natural to ask whether this weaker first half is a sign of a lasting downturn or a slowdown. And I would say, in the short term, it's a sign of a slowdown in the market. But history has shown that the refractory market is rather resilient and that following slowdown periods, we often see a catch-up effect. Maintenance has to be done even if production is being reduced, and that's why we expect the activity to pick up in the next quarters. And with the organizational changes made now in Sweden with effect from September, we strongly believe that we will be able to increase our sales in the second half and also through 2026. And by also maintaining a strict cost control, we expect that we should be able to reach our midterm EBIT target of 10%. At the end of 2023, we announced that an agreement had been signed to sell two of our properties, both in Bjuv to the Bjuv Municipality with the possibility to lease them back for up to 5 years, after which our production in Bjuv will need to be relocated. After the announcement, a private citizen submitted a complaint stating that the price was too high. In March this year, the Administrative Court in Malmö reviewed the case and decided not to approve the transaction, referring to a lack of sufficient documentation supporting the price agreed between Höganäs Borgestad and Bjuv Municipality. Then, the Municipality subsequently appealed this decision, submitting further supporting documentation. And in June, the court confirmed that the appeal will be taken up for review based on this new documentation. It's also stated that the case is likely to take 9 to 10 months to process, meaning that we should expect a decision either by the end of '25 or early 2026. So from our perspective, we still expect the transaction to be completed, but we will, of course, post any updates on the stock exchange. Finally, a brief summary of our latest acquisition, which was announced just before the summer when we acquired Emcotech AB, a small Swedish service company within industrial flue glass cleaning, serving both some of our existing refractory customers and also potential customers. And in 2024, Emcotech reported revenues of SEK 45.4 million and an EBITDA of SEK 6.4 million, primarily serving customers within pulp and paper and also the steel industry. With this acquisition, we strengthened our offering on industrial flue gas cleaning, which is increasingly important for many of our customers. And we also expect synergies, especially within sales between Emcotech and our refractory business, especially within Sweden. The purchase price amounted to SEK 10.5 million at closing, with an additional performance-based earn-out of up to SEK 10 million. Financing was secured through loan agreements with Nordea, including a SEK 9 million mortgage loan and a SEK 10 million overdraft facility to account for seasonal fluctuations in operational working capital. And we strongly believe that this acquisition will be a fruitful acquisition, both financially and also operationally for the group. And we look forward to integrating Emcotech and the whole team into the group.

Thank you. Let's go into the financials and sum up for the group. Borgestad has a decrease in revenue in second quarter by 6.5% compared to same quarter in '24 due to decrease in Höganäs Borgestad activity, as Bendik has already mentioned. It's a profit decline in second quarter compared to the same period '24, driven by lower revenue in Höganäs Borgestad. But also, I would like to point out that Agora Bytom is increasing the profit. Negative effects from financial items due to increased cost of hedging for Agora Bytom. First half last year, we had the old hedging, while in second half '24, the new hedging was entered and that is affecting first half '25. Adjusted profit before tax at NOK 20.9 million for the quarter, a bit weaker than last year. Working capital increased ahead of high season. Mortgage debt in Höganäs Borgestad was refinanced during second quarter on better terms. If you look into the details of the balance sheet, our investment property of Agora Bytom increased in NOK due to a weaker NOK compared to euro this year. Working capital increased to NOK 321.1 million compared to NOK 312.5 million end of Q2 '24, mainly due to increased inventory. Total interest-bearing debt stood at NOK 508.6 million end of second quarter '25 with net interest-bearing debt at NOK 391.6 million. Mortgage debt in Höganäs Borgestad was refinanced in the quarter with 0.8% margin improvement. New due date is end of June 2028. Further financing in Bank Pekao connected with Agora Bytom, the due date is 31st of December 2028, and total debt stands at EUR 28.9 million at end of second quarter 2025. In the quarter, total dividend of NOK 34.6 million was distributed to shareholders of Borgestad and minority shareholders of Höganäs Borgestad, which impacts, of course, the equity and equity ratio compared to end of '24 and of course, decreases the cash situation as well when you compare to end of '24 and same period last year. The property in Bjuv remains classified as held for sale, pending expected court decision as outlined by Bendik. If you look at the cash flow, the Group's year-to-date cash flow from operating activities was negative with NOK 92.7 million compared to negative NOK 13.6 million in 2024. The material change is due to shift in inflow from high season activity within Höganäs Borgestad. For 2023 high season, the liquidity inflow was mainly in first quarter '24, while due to more timely invoicing during 2024, the inflow was received in fourth quarter '24. This is, of course, affecting the comparison figures. And we expect that the inflow from the high season will come in fourth quarter this year as well, meaning that we expect a positive net cash flow from operating activities going forward in the second half. As Bendik elaborated, in second quarter, the Group closed the acquisition of the shares of Emcotech, influencing the net cash flow from investing activities within the quarter. Cash flow from financing activities was positive with NOK 14.7 million year-to-date compared to a positive NOK 4.9 million last year. The group has in second quarter distributed dividend, as mentioned, and this is affecting the financial activities. Available liquidity as of June 30, 2025, was NOK 126.9 million, which includes NOK 24 million of undrawn credit facilities, a comfortable level when we have entered the high season within Höganäs Borgestad. When we look at the outlook and priorities, Höganäs Borgestad remains focused on operational improvements, capital efficiency and cash flow gains in 2025. And as Bendik communicated, we are positive for second half of 2025. Revenue and EBITDA for Agora Bytom are expected to increase slightly in the years ahead with the impact of cost cutting and increased occupancy rate. The last year has been really good on increased occupancy rate, and we expect also that to be seen going forward. Focus is shifting towards renegotiating or replacing lower leases to increase actual rent per square meter per month to increase the total rent from the property. Borgestad will continuously review strategic M&A opportunities and other liquidity events for Agora Bytom while exploring add-on acquisitions for further strengthening Höganäs Borgestad's position in the Nordic refractory market. Thank you.

Let's move on to the Q&A. And I would like to remind everyone listening in, they can still ask questions using the Q&A function. So I guess you touched on many of the questions there, but I will still read them out, and then you can fill in if there's anything you would like to add. So regarding the acquisition of Emcotech, what is the strategic rationale? And what kind of synergies do you expect in the short term and the long term?

Well, I can answer that. The strategic rationale is, I would say, two-fold. First of all, many of our customers, they demand a better flue gas cleaning in general, and they also request a broader offer from us as a supplier. So with this acquisition, we are able not only to provide refractory services, but also flue gas cleaning as many of these projects are run in parallel. So when a factory is paused and we are performing refractory services, that's also when the flue gas cleaning is serviced. So that's one part. And the other part is that we see that although we do have many of the same customers, Emcotech also has customers which are some of our potential targets on the refractory side. So we see Emcotech as a potential door opener for our refractory business and vice versa. So that's the strategic rationale. And financially, we believe that with the agreed terms that this should be a favorable acquisition given that we succeed with the integration of Emcotech into the group.

Thank you. And then along the M&A lines, do you see further M&A opportunities along the same value chain?

I would say that we are not focused at the moment on M&A within Höganäs Borgestad too much. We are optimistic, but our main focus is to improve our existing business. But of course, if opportunities appear, which we see favorable, then we will, of course, consider it. But our main focus is now to improve our existing business.

Yes. Thank you. Moving on to 2 questions regarding Agora Bytom. Agora continues to perform well. What is driving the growth? And how do you view the Polish shopping center market going forward?

So what is driving the growth is both increase in revenues due to the increased occupancy, but also the cost-cutting implemented first half of '24 that we are, of course, having a full effect now in 2025. And the focus in Agora is by management is good. We have now a good pattern going forward and good momentum on new leases, I would say. So we are optimistic for that part, yes.

Perfect. Then we have one last question, if we don't receive any in the last minute there. What can we expect -- or when can we expect an exit in Agora?

Yes. And of course, that is also referring to the second half of your last question. Exit of Agora, I would say that from an operational perspective, the center is ready for an exit. But the Polish property market and especially shopping center market is not there yet to start an exit process. But of course, we are following it closely. But as mentioned in the last presentation -- in the past, it has been -- or end of '24, it was a couple of interesting transactions for prime shopping centers in Poland. That is hopefully the start of the prime transactions, but it will take some time before I think we'll see secondary cities to be involved in that transaction journey.

Thank you so much. That concludes today's presentation. Thank you, Pal, and thank you, Bendik, and thank you to everyone who is listening in.