NTG Nordic Transport Group A/S (NTG) Earnings Call Transcript & Summary

First of all, welcome to our Q2 webcast presentation, and thank you for listening in. If we start on -- moving to Page #3. Here, we have today's presenters. It's me, Michael Larsen. I'm the Group CFO (sic) [ CEO ] of NTG Nordic Transport Group. And joining me here today, I have Christian Jakobsen, our Group CFO. Then let's please move on to Page #4. Here, you see the topics that we will cover on this call today. The agenda revolves around our performance in the second quarter and the first half of 2020 on a group level and for each of our divisions. And by the end of the presentation, we will open the microphone to questions from the audience. Then, please, let's move on to Page #5. These are the main highlights for the second quarter. In general, we are very pleased with our performance in the second quarter of 2020, which demonstrated our ability to quickly adapt to changes in the market we operate within. And because of this, our results for Q2 were significantly better than we had looked forward in the beginning back in April, when the pandemic started and caused a high degree of uncertainty around the world. There's no doubt that COVID-19 also impacted our business in the second quarter. But towards the end of the Q2, we've experienced a strong pickup in the activity that exceeded our previous expectations, and the positive momentum continued into July and August. The increasing activity was especially seen in the Road & Logistics divisions in the Nordics, where, for example, our major Nordic [ capacity ] performed extremely well. The Air & Ocean division continues to be impacted by the challenging market conditions, and the limited scale makes it difficult to benefit from opportunities arising from this unusual situation to the same extent as larger players in the market. Because of the lower activity level, we have implemented cost savings across both divisions and headcount reductions at approximately 5% of our staff have been implemented. We also introduced a range of temporary cost savings that supported profitability for the quarter. We, of course, continue to monitor the situation closely and evaluate if further adaptions (sic) [ adaptations ] in our organizations are required in the future. When it comes to Ebrex, our most recent larger acquisition, the integration of Ebrex is progressing according to plan, with the first synergies executed in June 2020, and we still expect synergies of around EUR 1.5 million in total, with full effect starting from Q2 2021. For Gondrand, we are still working on the restructuring, and we restructured primarily the German activities in the first half of the year. But due to the current market situation and significant Air & Ocean activities in Gondrand, we'll no longer expect to reach breakeven in 2020, but we continue to work with the entities to find a sustainable solution. Finally, we updated our guidance on the 5th of August, as you may have seen. The update was based on the better-than-expected performance in June and July, and we maintain the guidance of revenue between DKK 5 billion and DKK 5.4 billion and an adjusted EBIT between DKK 200 million and DKK 230 million for the full year 2020. However, I want to emphasize that our guidance is subject to a high degree of uncertainty, and the guidance assumes continued gradual improvement of the market conditions in the second half of the year. I'll now hand you over to our CFO, Christian Jakobsen, who will take you through the numbers from here.

Yes. Thank you. And just as service information, Michael has not been celebrating. The whole night, he has sore throat and has also been tested for COVID-19. We do tasks sitting in the same room as him. So if you flip to Page 6, please, then you can see our Q2 highlights. Net revenue in Q2 was DKK 1.2 billion, which is 7% below Q2 2019. That correspond to an organic growth of minus 11.1% and an Ebrex acquisition growth of 4.1%, we will come back to the gross components when we go through each segment. But as you see on the right, we have started something new. We have divided our organic growth into 3 categories, namely, discontinued activities, start-ups and existing businesses. That is to increase the transparency in these extraordinary circumstances. On the EBIT side, we have increased with 10% to DKK 56 million in Q2, which corresponds to a margin of 4.5% versus 3.9% in Q2 2019. The increase was driven by the acquisition of Ebrex, these cost savings and government supports. And then we have seen a very strong performance in our Nordic Road & Logistics subsidiaries. Also to make sure that we're giving the full information, then we can also say we have booked a significant restructuring cost above EBIT from the former Gondrand entities, particularly in Germany, and this is offsetting the profitability. And if then we flip to Page 7, then we have the Road & Logistics. In Road & Logistics, we made a revenue of DKK 975 million, which is 4% below Q2 2019. And as you see on the right, the development was driven by the discontinuation of nonperforming activities in Germany, Italy and Czech Republic, which contributed with a minus 4.6% to the organic growth, and then lower activity contributed with another minus 5.2%, which means that the organic growth was minus 9.8% in Q2 2020. On the EBIT side, adjusted EBIT increased with 24% to DKK 53 million, corresponding to an operating margin of 5.4% versus 4.1% in Q2 2019. And as we said before, this is due to the very strong performance of our Nordic road companies, the Ebrex acquisition, the cost savings and then the discontinuation of the nonperforming activities. And then if we flip to Page 8, then we have the Air & Ocean. In the Air & Ocean division, we realized a net revenue of DKK 259 million, 15% below Q2 2019. The discontinuation of nonperforming activities in Italy had a negative impact of 6%, and then the rest comes from the lower activity level throughout that division. And this accounts for 21% of the negative organic growth. On the other side, we have seen a strong performance of our start-ups, primarily in the U.S., which have contributed positively in Q2. In EBIT, we have decreased from -- it decreased 64% to DKK 2 million, corresponding to a margin of 0.8% versus 2.9% (sic) [ 2.0% ] in Q2 2019. This is due to the fact that this tough market situation where we have a limited scale in our Air & Ocean division and which made it difficult to maneuver in the same way as we've seen larger players do. Then also, we have had a restructuring cost in Germany which has negatively impacted our profitability. And then on the other side, we can say that the U.S. start-ups we have discussed prior, they have now turned the loss in Q1 into a profit in Q2, and we have been able to reach a breakeven in our Chinese operation. And then we have, of course, done what we also have done in the road, used government support programs, cost savings and divestment of nonperforming activities, which have had a positive effect. And then if we flip to Page 9, then we have presented the other key figures, as we name it. On top, we see -- on the left, we see the net working capital. We are very pleased to see that our net capital has improved significantly. We went out to all our suppliers and asking them for longer payment terms. And we have not been met with that bigger pressure from our customers. That means that we have been able to improve our net working capital to minus DKK 209 million. Then we see that on the cash generation, our adjusted free cash flow was DKK 151 million in Q2. Please remember that in -- that negative cash flow from Q1 was driven by the acquisition of Ebrex. And then finally, on the bottom, we see the net interest-bearing debt, excluding IFRS 16, which continues to be in negative territory. We had a cash position of DKK 164 million by the end of Q2. And then if we flip to Page 10, then we have just restated the outlook. As Michael said, we're maintaining the guidance of DKK 5 billion to DKK 5.4 billion internal. We have -- expect an adjusted EBIT of DKK 200 million to DKK 230 million. And then we have also a little bit clear on our minorities. We now expect that the minorities will be around 10%. This is mainly due to the acquisition of the remaining 15% of the share in Ebrex, but also the acquisition of other Ring-the-Bell movement on the Polish and Finland companies. And with these words, we will now open for the Q&A.

[Operator Instructions] Your first question is coming from the line of Marcus Bellander from Nordea.

Yes. I have a number of questions. First, starting with Ebrex. It seems that EBIT margin of Ebrex was higher in the first half of the year than what you indicated when you acquired it. Is that seasonality? Or what's going on there?

Yes. We are not seeing something really moving on the seasonality on the Ebrex. We expect Ebrex -- we have no indication that Ebrex will end differently than what we expected. So what -- we did see a very, very strong March in Q1. So that is, of course, affecting the Ebrex', of course, seasonality there. If you have a big cost base that have a lot of logistics. So if you have the strong months, you will see an extraordinarily high EBIT margin within the Ebrex organization. And that was what we saw in March. I think that for the Q2, it was just as we had expected.

Okay. And when it comes to the restructuring or integration costs associated with Ebrex, have you said how large they will be in total?

Yes. We -- well, when we acquired Ebrex, we said that it was EUR 1.5 million, and that is what we are expecting still to be. And at the moment, we have used 4.4 year-end -- end of June. So there was no effect of the Ebrex synergies in Q2, but we will start seeing them from Q3.

Okay. And the rest of the integration costs, will they be booked in the coming couple of quarters?

Yes. Until the end of quarter 1 in 2021, we will definitely see the last, but the main part will be this year.

Okay, okay. Great. And then when it comes to -- you mentioned some restructuring costs in Gondrand, which you've included above EBIT. I'm just wondering if you could disclose how large those are.

Yes. It's close to DKK 10 million. We have booked above the EBIT this -- for the quarter.

That helps a lot. And the discontinued activities in Italy, Germany, and I believe it was Czech Republic, were those all Gondrand activities?

They were Gondrand activities, yes. But we closed them last year primarily, so that is only an effect on this year.

Okay, okay. So that's last year's closures. Okay. I get it. But -- so the restructuring costs you took in this quarter, what were they for? What do they relate to?

They were also relating to Gondrand. That was in actually road primarily and also Air & Ocean, we use -- we decided to -- we have been struggling to get this turnaround done. And was -- had plans, and then now we finally decided that we needed to cut some of the business down and then -- and change the production. So that's what we have done at the end of Q2.

Okay. So that's restructuring costs. It's mainly layoffs? Or is it impairments?

Mainly layoffs.

Layoffs. Okay. Okay.

I meant layoffs here.

Okay. And then on the working capital, you said you'd asked your suppliers for longer payment times. I'm just curious as to why because, I mean, you have a very strong balance sheet and interest rates are negative. So what's the point?

Yes. But please remember, we acquired Ebrex, and then we saw this crisis coming, pandemic coming, and everybody was talking about that it would be a very -- a money squeeze. And to prepare ourselves for this very expected money squeeze, we went out and made a new credit line with our banks. And then we also went to our suppliers and said that, in particular, the asset owners that we also expect that they should be a little flexible and give us some more better payment terms. So we did it to make sure that we didn't come in a liquidity squeeze. And yes, then we actually ended up that the pressure from the customers was not as big as we had feared.

Okay. Understood. And so should we expect that working capital improvement to reverse in the second half of the year then?

You will definitely see that we cannot maintain on this high level. But we are working every day to keep high. But some of the suppliers, they definitely have given us for permanent, so -- where you will probably see that we would be strong, that the customers will put higher pressure on us. We are seeing that each day. And then on the other side, we have also put on some temporary savings -- payments in -- from government. So I think that's 35 million -- around 35 million just coming from government schemes, which will, of course, fall away throughout the second half. But we're seeing the same pressure as anybody else on our working capital. So that's also what we have said before, on the long run, you shouldn't expect us to be able to run with negative net working capital. But for the moment, we are very happy with the net working capital and keep fighting, to keep it as good as we can. But we'll not be able to maintain that level.

Okay, understood. And then if you could maybe talk a little bit about the current trading. I mean I think you mentioned in the report that things started improving in May. They got significantly better in June, even a little bit better in July. Just curious what you're seeing at the moment. And maybe if you have any -- what you're hearing from your customers about -- to what extent the recovery we've seen in June and July was driven by restocking effects. Any color you could add would be appreciated.

Yes. But as we said that May was picking up faster than we expected and coming from that everything was closed in the end of April and beginning of May, we already saw a strong pickup in May, and June was actually a record-high month for us. And then we were also very pleased with the activity level in July. We are not able to say something about August because August is holiday month where on some markets, you are seeing that in the south of Europe, it's standing still. And then some of the markets within the Nordics, we are seeing normal activity. So we can't tell you that how August will look. But at the moment, we are very happy about the July and also see that we are positive about the situation at the moment. And what we're hearing from the customers, that's also differs from customer to customer. I think that the automotive business is very cautious about their operations and some of the others, they are having a very strong production. And also what we're hearing, we're also reading in the newspapers and seeing that people are, yes, expecting a better situation than what we feel at least.

Okay. Great. And then finally, if you could say something about the M&A landscape or environment, if it has changed at all, if you're getting more calls from people who want to sell their businesses because they're struggling in this downturn. Any color you can add on that would be appreciated.

I think that we are not getting a lot of extra calls. We have a strong pipeline. We're working to stay -- to close. And we then have the cash now to close these deals. We are not seeing an increase of stressed activity from distressed companies. We are seeing the same level, but the difficulties at the moment is at the moment to agree on not only the multiplier, but also what is the EBIT that we should use because some of them have had a strong 2019. And I think that they will maintain that even though that '20 is not as strong and we, on the other side, are saying what would be the normalized result, that is difficulties at the moment on the M&A. But we still have some very interesting M&A targets on our list, and we will do our utmost to close them.

[Operator Instructions] There are no further questions at this time. Please continue.

Okay. Thank you very much for listening to us, and we will see you again when we are publishing the Q3. Thank you very much.