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

Ladies and gentlemen, thank you for standing by, and welcome to the Nordic Transport Group Q2 2021 Analyst Call. [Operator Instructions] I will now hand the conference over to your speaker today, Michael Larsen. Please go ahead.

Thank you. Welcome to our Q2 2021 conference call, and thank you for [ dialing in. If we move on to Page 2. We kind of ask you to read the important notice provided in this slide and then let's move on to Page 3. Here, you see the presenting team of today. My name is Michael Larsen, and I'm the Group CEO of NTG Nordic Transport Group. And with me today, I have Christian Jakobsen, our Group's CFO. If we then move on to the next page. Here you see the agenda we intend to go through on the call today, including the Q2 highlights, a review of the financial performance and other key figures, the full year outlook provided on the 1st of July and an overview of the acquisition of [ NTG Group announced on the 16th of July. At the end of the presentation, the line will be open to questions from the audience. If we move on to Page 5. These are the main highlights for the second quarter. Overall, the second quarter represents yet another strong quarter with significant growth in both our divisions. The second quarter was characterized by continuing extraordinary market conditions in [ Air & Ocean, with no expected near-term signs of normalization, especially within the ocean freight, and high activity as well as capacity shortage in the Road & Logistics division. The double-digit growth and strong financial performance that was realized in Q2 clearly reflects the ability of the organization to adapt to the challenging market conditions. During the second quarter, we also announced the acquisition of [ Twente Express and Neptun Transport. And after Q2, on the 16th of July, the acquisition of the NTG Group. Finally, we updated our full year outlook on the 1st of July 2021, and we maintain the guidance of revenue between DKK 6.3 billion and DKK 6.7 billion and an adjusted EBIT between DKK 450 million and DKK 490 million. With those words, I'll now hand you over to Christian, who will take you through the financial results.

Thank you, Michael. As Michael said, we are very proud of the results in the second quarter, and we are very pleased to see that the strong momentum continues, and the performance in both divisions exceeded our previous expectations. On Page 6, you see the main financial highlights for the group, where net revenue in Q2 totaled DKK 1.7 billion, up 39.4% versus Q2 2020. The positive development in organic growth continued with an increase of 31.3%, while effects from acquisitions within Road & Logistics contributed 8.1%. Adjusted EBIT increased 146% to DKK 138 million in Q2's '21. The increase includes the net positive one-off effect of DKK 20 million in the Road & Logistics division related to the early termination and reassessment of previously impaired lease agreement for an office and logistics facility in Switzerland. Moreover, the increase in adjusted EBIT was driven by organic and electricity growth in gross profit, and increase in the conversion ratio in both divisions. The operating margin was 8.0% for Q2 '21 and 6.8% when adjusting for the one-off effect in Switzerland. And then if we move to Page 7, you see the summary of the key financial performance indicators, which illustrate that the particular -- the extraordinary situation in the Air & Ocean market and capacity constraints in certain growth markets, leading to a price pressure, had a negative effect of -- on gross margins in Q2 '21 compared to recent previous quarters. However, the reorganizations and restructuring initiatives completed in 2020, efficiency improvements in both divisions supported a continued upward trend in the operating margin for both divisions. Again, please note that the operating margin was 6.8% on group level if we adjust for the net positive one-off effect compared to 4.4 -- 4.5% in Q2 2020, and 7% for the Road & Logistics division compared to 5.4% in Q2 2020 as illustrated through dotted lines in the graphs. Then if we go to Page 8, we see the financial review of the Road & Logistics division. The division generated a net revenue of DKK 1.3 billion in Q2, which was 36% above same period last year. The increase was mainly driven by organic growth that contributed 25.2% and acquired growth driven by the acquisitions of Saga Trans, TB International, Cargorange, Twente Express and Neptun Transport that contributed with 10.3% for the quarter. Total growth for the period was 36%, including FX effects of 0.5%. Adjusted EBIT increased 140% and to DKK 113 million, corresponding to an operating margin of 8.5% versus 5.4% in Q2 '20. And as I said, the operating margin was 7.0% if we adjust for the one-off items. And then if we flip to Page 9, you see the results for the energy division. The division realized a net revenue of DKK 394 million for the quarter, which was 52.2% above the same period last year. The organic growth was driven by higher Air & Ocean rates globally, abroad-based activity increases, together representing a growth of 52.3% in existing business. In general, we continue due to benefit from the extraordinary Air & Ocean market conditions that continue to redirect volumes to the open market in Q2 '21 as consumer search -- customer search for competitive prices and security of capacity. A startup in the U.S. contributed positively to the total growth with 7.2%, while the close down and divestment of activities had a negative effect of 5.3%. Gross profit increased approximately 25% for the quarter while the gross margin decreased 4.4 percentage points. The development was driven by a combination of mix effects and some margin freight pressure as freight rates significant -- it increased significantly compared to the same period last year. Adjusted EBIT increased approximately DKK 2 million from second quarter last year to DKK 25 million in the second quarter of '21, corresponding to an operating margin of 6.2%. And then if we flip to Page 10, we see the highlights of other key figures. On the left, you see the net working capital decreased to minus DKK 136 million (sic) [ DKK 163 million ] as per June 30, which was higher than last year, and related to increased activity during Q2 '21 and extraordinary circumstances in the Air & Ocean division and the benchmark period affected by the COVID-19 deferred payment schemes last year. Adjusted free cash flow came to DKK 98 million in the second quarter as illustrated in the middle, which was below the same period last year. Finally, to the right, we're seeing that interest bearing debt, excluding IFRS 16, that decreased to minus DKK 186 million, mainly due to the normalization in net working capital, partly offset by the acquisition of Neptun and Twente acquisitions. By the end of the quarter, we had a net cash position of DKK 186 million. And on top of that, we have a committed facility of DKK 500 million. And then if we go to Slide 11, you see the full year outlook for '21, which we announced on July 1. We maintained this guidance. And for the full year of '21, we expect a revenue in the range of DKK 6.3 billion to DKK 6.7 billion, and adjusted EBITDA in the range of DKK 450 million to DKK 490 million. The guidance includes the total net one-off effect of DKK 20 million described before and includes the expected effects of acquisitions already closed. On the right-hand side, you see the assumption underlying our guidance that relates to the current market condition in both divisions. And then as a concluding remark, Michael will now briefly present our latest acquisitions, which is the largest acquisition in the history of NTG in terms of total consideration.

Thanks. As I mentioned in the beginning, we entered into a conditional share purchase agreement regarding the acquisition of 100% the shares in NTG Group on the 16th of July 2021. NTG is a leading full-service provider of transport, logistics and warehousing solutions especially tailored to the furniture industry. On Slide 12, you see a brief overview of the group that operates from premises in Denmark, Sweden and Finland. On each location, the group also operates cross-docking and warehouse facilities, which represent the backbone of the NTG service offering to customers. And these facilities are business critical in order to handle non-pelleted and likely wrapped furnitures without damaging the goods, which is one of many key strengths that NTG has. A minor part of the acquisition and walled third-party logistic activities in Bjärnum, Sweden that are not related to furniture as you see in the bottom right of this slide. NTG handles more than 600,000 furniture consignments annually. And in 2020, the group reported a net revenue of approximately SEK 830 million, which they generated with approximately 320 employees in total. If we then move on to Page 13. Here, we have highlighted the main strategic reasons behind the acquisition. But first of all, the acquisition represents new product offering within growth and logistics as we strengthen our presence within furniture logistics significantly and onboard more than 300 furniture specialists, which is very similar to what we did in the automotive niche with the acquisition of Ebrex back in 2020. Secondly, the acquisition will increase the scale of our Nordic Road & Logistics organization after closing, both on the procurement side for the NTG as a group, but also in terms of the services we can provide to furniture brands, manufacturers, wholesalers and retailers. As we, together with NTG, will be able to enhance NTG's one-stop shopping offering by adding NTG's portfolio of cross-European Road & Logistics and global Air & Ocean solutions. In this way, the acquisition is expected to give rise to network effects across the NTG Group. By promoting NTG's portfolio across European Road & Logistics and global Air & Ocean solutions to NTG's customers. Finally, the new niche represent an all platform for growth as we see multiple opportunities to strengthen and expand the business to new customers, segments and also geographies. On the right-hand side, you see the transaction details, including the enterprise value of SEK 375 million and the conditions to closing that includes the competition approval in Denmark and Sweden. We have already now received the competition approval in Sweden, and we therefore only await the Danish approval before closing can take place. That was all from our side. So moderator, if you'll please open the line for any questions. Thanks.

[Operator Instructions] We have one question from the line of Michael Rasmussen.

It's Michael Rasmussen here from Danske Bank. And excuse if some of my questions are something you've already mentioned, I had a few technical issues along the call. First of all, can you just discuss a little bit on the assumptions into your guidance for the second half? When I look through this on an organic basis and also including your comments in terms of the state of the market, it does seem a little bit conservative to me. So if you can just run through what exactly are you seeing in the second half? And then I'll continue with my other questions afterwards, if that's okay.

Yes, of course. Please remember that we had a DKK 20 million one-off effect, so that comes to that current run rate on the first half year is DKK 218 million on adjusted EBIT. And then we are seeing the gross margin pressure, as also you can see in particular on the growth side. So we do not see -- we understand that you are looking for a little bit more. But you also have to remember that NTG is not a part of this outlook. So we expect that the activity will be high in the second half, but we also expect that we will see the margin pressure maybe also develop a little bit compared to where we were at the end of Q2. So a high margin pressure, and then the higher activity there to support it and what our subset are based on.

But do you expect the yields to come down on the Air & Ocean side from where they are right now? Or do you expect them to stay at the Q2 levels?

I think that we are seeing a little bit more normalization in the air business. And what we hear is that the ocean business is a little -- would be around the same level at least for Q3 and then we have to see what happens in Q4.

Fully understood. Okay. My next question here is a little bit on the dynamics in the ocean market. I recall also from after Q2 that -- or sorry, after Q1 that you spoke about, you've gone a little bit more spot-based in the market, i.e., less kind of 1 to 3 months contract, if I understand that correctly. Can you just explain the dynamics a little bit in that? Is that also part of the explanation for the gross margin pressure? Is it simply that given your size, you can't get any or significant share of 1 to 3 months contracts with the carriers and thus you're fully in the spot market, which means that your top line is supported, but the GP doesn't go up in the same trends?

I don't -- I think we are very happy about our GP, maybe the gross margin is under pressure. But we do also think that we see the same movement by our peers. So what we are seeing is that we are not able to get more than -- let's say, we get $200 on a container and then it costs $5,000 or it costs $10,000, then the job with the gross margin will, of course, decline, and that is still what we are seeing. And as we can restate that we are really operating on a spot market today, and it's really hard to give base and [indiscernible] on the carriers. But I think that our trend is almost the same as what you see out in the market.

Great. And again, sorry, if you've already mentioned this in the call. I note that in the report, you talked about also price pressure from both capacity constraints, but also regulatory changes in Denmark when Denmark is the intermediate destination. Can you please explain that to me?

But you have the new rules in Denmark where you are not allowed to drive with foreign drivers if you're not paying them the same as a Danish driver. And it is really difficult for a [ haulers from, let's say, Romania or Poland or something to understand the Danish routes, and that means that today we are not allowed to do the domestic in Denmark with our foreign haulers and that means they will run empty instead of taking that drive spending in the north of Jutland, and let's go back to Germany, then they will not be able to take a load from north of Jutland to, let's say, South Denmark and then go further long. And that, therefore, they have to drive NTG, and that is, of course, pressing on our margins.

Fully understood. I don't know if there are any other questions from analysts on the call or I can continue.

I think you can continue.

Okay. So I see what you say on NTG. Maybe you can -- I mean, they do quite decent margin business already now. Can you talk a little bit about the potential for synergies also going forward? So to ask this is in another way, what was the acquisition price post synergies, which you typically start to talk about also in part of acquisitions?

I don't think we are -- we know -- just got that today. But we definitely see some synergies. But for you to understand, it's not a synergy on -- in provision and so on. It is synergies where NTG will be able to run some of the lines for NTG. So it's not a synergy case, in fact, in terms of saving a lot of acquisitions or there will definitely be a lot of cross sales. And there will also be, of course, the normal synergies and fares and so on. But as we are not in the position where we can come in and tell that at the moment. We will definitely come back on that when we are able to close the deal.

Fully understood. So can you just explain what exactly you mean with the incentive structures are to be aligned with NTG's partnership model? So is this a new PAD that you're setting up? Or is it something else that you do in terms of bonus programs?

Yes. We will definitely make them -- some of the key employees to partners and that means selling some of the shares to them. So it will not be a fully owned company one we would acquire, and make a partnership model out of this one as well.

Okay. Great. And so how do you feel in terms of management capacity right now? I mean, you've done 4 acquisitions in just recent times. Will you now kind of take a pause and make sure they're integrated, I mean NTG is also a bit bigger. I think it's the third biggest company you've ever purchased or will you still be able to buy kind of small- or medium-sized companies along these integrated impacts, yes?