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

Good morning. This is the conference operator. Welcome, and thank you for joining the NTG Nordic Transport Group Full Year 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Christian Jakobsen, Group CFO. Please go ahead, sir.

Yes. Thank you, and welcome to our full year 2022 conference call, and thank you for listening in. If we go to Page 2, we'd kindly ask you to read the important notice provided in this slide. And then if we move to Page 3. My name is Christian Jakobsen. I'm the Group CFO of NTG Nordic Transport Group. And today, I will take you through the Q4 and full year result -- financial results of 2022. And if we move to Page 4, you see the agenda for this conference call, which includes highlights for the fourth quarter and full year 2022, a review of the financial performance of the group and the 2 divisions, a presentation of other key figures and the outlook for 2023 as well as our midterm financial target. By the end of the presentation, the line will be open for questions from the audience. If we move to Page 5, you see the main highlights for 2022. 2022 was yet another turbulent year for the global transportation market as well for NTG. And we are extremely proud that our skilled and dedicated employees managed to successfully navigate these structural changes to work on challenges in cooperation with our customers. Elevated volatility and macroeconomic uncertainty characterized 2022, mainly caused by the war in Ukraine, port congestions and COVID-infected lockdowns in China, which resulted in increased uncertainty and unpredictability, soaring energy prices and disruptions of global supply chains. For the Road & Logistics division, the beginning of 2022 was impacted by the effects of the implementation of the EU Mobility Package, causing widespread capacity shortages which was further exacerbated by the war in Ukraine. In the third quarter, a weakening market outlook and [indiscernible] demand, however, led to reduced supply side pressure while low imbalances continue to persist. For the Air & Ocean division, the structural imbalances and uncertainties that characterize the second half of 2021 and the first half of 2022 were further accelerated by the outbreak of the war in Ukraine. However, the ramifications of increasing energy prices, low demand and inventory [ destocking ] altogether led to freight rate declines, which accelerated in the second half of the year. Despite uncertainty and unpredictability, we continued the positive trajectory in 2022, which lead to double-digit growth in operating profit, and we delivered on our outlook for 2022 as announced on the 6th of December last year. In 2022, we completed the acquisition of Aries Global Logistics, the largest acquisition since our inception in 2011. We have consistently doubled the volumes of our Air & Ocean division and significantly strengthened the division's activities globally. The integration is progressing according to plan, on track for finalization in the first half of 2024. With those words, I will proceed to the review of our financial results for 2022. On Page 6, you see the main financial highlights for the group. Net revenue for the full year 2022 totaled DKK 10.2 billion, representing an increase of 40% compared to 2021. Organic growth contributed 16%, driven by higher freight rates and activity, while acquisitions, mainly AGL, contributed with additional 26%. [ Security ] FX had a negative impact of 1.8% in 2022. Gross profit increased 37% to DKK 2 billion, corresponding to a gross margin of 19.7% versus 20.2% in '21. The margin normalization and easing any [ input factor ] price pressure had a positive effect on gross margins towards the end of the year, partially offset by the effects of the acquisition of AGL. Adjusted EBIT increased 40% to DKK 758 million in 2022 and despite a lower gross margin, the hard work of NTG's dedicated employees coupled with our scalable operational setup, ensured that we safeguard the operating margin at 7.4% in line with 2021. Then if we move to Page 7, you see the summary of the key financial performance indicators on a quarterly basis. As [ you can see ] to the left, the gross margin improved in Q4 compared to Q3 as a result of the freight rate normalization for the Air & Ocean division, driving higher gross margin and reduced input factor pressure within the Road & Logistics division. The acquisition of AGL had a marginal adverse effect on gross margins in 2022. The quarter-on-quarter conversion rate of development in the Road & Logistics division was mainly driven by reduced activity and the ratio was approximately in line with the same period last year, whereas the Air & Ocean division experienced a decrease in conversion ratio in Q4, driven by the weaker markets and the acquisition of AGL. The operating margin development in fourth quarter of 2022 was primarily a result of the negative development in the conversion ratio within the Air & Ocean division as mentioned before. Then, if we move to Page 8, you see the financial review for the Road & Logistics division. The division generated a net revenue of DKK 6.8 billion in 2022, 22% above the same period last year. The increase was related to those acquisitive growth, contributing 10% to total growth and organic growth contributing 15%, driven by the effects of volume and price momentum carried over from 2021. FX effects mainly related to Turkish lira, Swedish crowns and Polish zloty had a negative effect on growth of 3% during the year. Gross profit increased 21% to DKK 1.4 billion in '22, corresponding to a gross margin of 20.3% versus 20.6% in '21, and the development was mainly driven by increasing cost of recurring capacity compared to '21, partially offset by freight rate adjustments implemented throughout the year. Adjusted EBIT increased 24% to DKK 531 million, corresponding to an operating margin of 7.8%, in line with 2021. The EBIT increase was mainly driven by higher activity, effects of acquisitions and the restructuring of low-performing activities. And then if we to flip to Page 9, you'll see the financial review for the Air & Ocean division. The division generated a net revenue of DKK 3.4 billion in 2022, 97% above the same period last year. The increase was mainly driven by acquisitive growth of 77%, driven by the acquisition of AGL in mid-2022, and organic growth of 18%, mainly driven by elevated freight rates in the first half of the year. Gross profit increased 92% to DKK 636 million, corresponding to a gross margin of 18.5% in 2022 compared to 18.9% in 2021. The development was a result of the acquisition of AGL, coupled with increasing pass-through revenue from elevated freight rates, which drove gross margins lower compared to 2021. Adjusted EBIT increased 103% to DKK 227 million corresponding to an operating margin of 6.6% versus 6.4% in '21, primarily driven by the acquisition of AGL, increased activity and operational efficiency. Then if we flip to Page 10, you see an overview of other key figures. On the left, the net working capital decreased to negative DKK 165 million by the end of 2022, mainly driven by the release of [indiscernible] within the Air & Ocean division, reduced activity compared to previous quarters and a decrease in sales outstanding. Adjusted free cash flow totaled DKK 263 million in the fourth quarter of the year and DKK 740 million for the full year compared to DKK 288 million in 2021. The development was mainly driven by increasing operating profit and decreasing net working capital commitments. Finally, to the right, you see the net interest-bearing debt, excluding IFRS 16, which totaled DKK 201 million by the end of 2022 compared to 2021. The development was mainly related to the acquisition of AGL completed in May 2022. And then if we move to Slide 11, you see the full year outlook for 2023, where we expect an adjusted EBIT in the range of DKK 620 million to DKK 700 million. The outlook for 2023 assumes a weakening macroeconomic environment with continued destocking and renewed consumer confidence in the first half of 2023, followed by a gradual rebound in activity during the second half of the year. The Road & Logistics division is assumed to experience a low single-digit decline in volumes in 2023 compared to 2022 based on an expected moderate adverse development in transport activity and changing market dynamics, driving increasing repositioning cost on certain corridors, partially offset by reduced capacity shortages and normalized spot rates. The Air & Ocean division is assumed to experience a single-digit decline in volumes in 2023 compared to 2022, with freight rates and yields continuing to decline. The assumption is based on expectation of reduced transport activity resulting from continuing inventory depletion and soft consumer confidence. The outlook for 2023 includes the full year effect of the acquisition of AGL, Kontinent Transport and Solida, which we closed in 2022, and it does not include potential impact from new acquisitions during the year, if any. Currency exchange rates are assumed at current level. And because uncertainty remains high, the assumptions underlying the outlook may change. For 2023, no guidance will be provided for -- on net revenue, driven by a combination of freight rate volatility and limited visibility, making predictability and -- of pass-through with revenue effects difficult. Whether or not revenue guidance will be resumed will be assessed in the wake of any market stabilization. In addition to the full year outlook in 2023, we're meeting our midterm financial target provided in 2021 annual report that you see on Page 12. No later than by the end of 2027, we strive to achieve DKK 1 billion in the adjusted EBIT. The target is based on the combination of organic growth and M&A, financed by our cash flow and credit facilities. No assumption of capital raise is included, although we will evaluate the source of financing prior to acquisitions. Finally, the midterm target assumes no additional material adverse events affecting regional and global cargo volumes and trade patterns, and NTG continuing to develop the business, establish start-ups and execute its M&A agenda. And that was all what we have planned for today. So moderator, please open the line for Q&A.

[Operator Instructions] The first question is from Michael Rasmussen of Danske Bank.

Three questions from me. First of all, on the AGL acquisition, you included some earn-outs on both 2022 and 2023, the criteria. Can you maybe talk a little bit about those 2023 criteria? And also if you expect the full earnout to be paid for what you have in your guidance? So that's my first question. My second question is if you could give us a little bit more in-depth update on the integration process, both on LGT, where I recall you had some issues in the IT integration side from Finland, I think, it originated. And also secondly, on the CargoWise rollout in relation to AGL, if you could give us some examples on benefits or anything that you're seeing there. In combination with that, if you could also add a comment on 2023 special items. Finally, on just the broad business, are you guys still pushing through price increases? And/or are you seeing any impacts from overcapacity in the market right now.

Michael, thanks for the questions. Yes, you are totally right. We have the earnout for AGL and it was based on the 2021 performance of AGL. Of course, we have seen a declining margin, particularly in the U.S. and you're also seeing the destocking cycle really taking effect in the U.S. We still believe that AGL will perform according to the earnout, and therefore, we haven't changed the earnout in our balance sheet. But of course, it will be -- 2022 was a fantastic year. And they, of course, easily hit the earnout there, but it will be more challenging in 2023. And on the integration of LGT, yes, you're fully right, we were delayed with the [ Finnish ] implementation. We went live on the 1st of December. And I think on the 15th of January, we choose the model of the integration support. Also, a successful implementation when we first went there. So -- and we have also made the data flow test for the Swedish operation. As I hope it will go out 1st of April, but it will go out in Sweden no later than 1st of May. And we have tested our workflow that it now suits the NTG set up. So that's going to progress. And then I'm also happy to say that we went live here 1st of March with CargoWise in Denmark. We didn't experience anything -- of course, you always see some challenges when you go live, but we didn't see any major challenge and/or any unexpected challenges. So we are largely working on cargo as with our setup. It is, of course, a pilot. So we will also have some lessons learned before we roll it out to the next one and maybe adjust something a little bit in our setup. But it seems like we have done a very good preparation, and we are happy to be live on the -- and we'll then proceed with the rollout to the next countries. Then on the price increases, we are not pushing any price increases from now. And we have also seen that the market is weakening. So I think that prices are pretty stable overall. There are some who wants a slight price decrease in some who want a price increase, but what we see today is that the spot market is really weak on the [ both ] sides.

And maybe also a comment on special items in 2023 from integrations.

Sorry. So I only noted the 3, but yes, it will -- no, I don't expect it would be higher than, I think, single-digit number.

The next question is from Dan Togo of Carnegie.

I also have a couple of questions, but let's just take them one by one. In terms of yields, both in Road and also in NTG in particular, maybe, how do you see the development during the year? Will they come in strong and then softly normalize? And when do you expect to see a normalization in yields? That would be the first question.

I don't think that we'll come in strong on the yields. I think we will see that -- actually, that the market is so soft that you also see a push on the yields at the moment and don't expect to see a big pick up there.

Okay. Fine. So more you don't -- [indiscernible] does that include sequential softening further or maybe a more stable development?

I think we will move into a more stable environment.

Okay. And then in your guidance, you imply a pickup in second half. I expect that to be on volumes. When you say pickup, is that sequentially so that volumes in second half is higher than first half? Or is it a pickup year-over-year? Just to understand the math here.

It's within '23. We expect that the first half will be softer than the same now.

Okay. And then on the market, a bit relating to what Michael asked, but maybe more broadly, are you seeing any bottlenecks at the moment throughout the system? Or is everything more or less back to normal, so capacity is easy to get your hands on?

I don't -- we don't see any serious bottlenecks, I would say. You always run into smaller things, but I haven't heard of any serious bottlenecks.

And then maybe some words on the market also, because a big deal might go down here in 2023 and then actually have impact maybe in '24 on Schenker. And we know that's both DHL and DSV is positioned at least. But if such a deal were to happen, how do you expect that to impact you? And are you seeing any effects in the marketplace right now that some of these bigger forwarders are trying to position themselves in respect of this possible transaction?

First of all, I will underline that we are not a candidate to take over Schenker. But of course, there will always be some movements in the market if we see such a big deal, and we will, of course, be ready to pick up if anything goes our way. So that I think we can share about that.

So if anything, it's positive for you, you say?

I don't know. It's -- yes, at least not seeing anything negative, but I don't have really an opinion on that.

The next question is from Lars Heindorff of Nordea.

Also a few from my part. The first one is regarding the share buyback, the DKK 75 million that you announced now, which will run until May. Now given the guidance that you have made on EBIT and even assuming a slightly lower cash conversion that you have had in '23 compared to '22, you should be able to still improve your capital structure and hence, probably end up '23 with a lower net interest-bearing debt to EBITDA compared to what you were ending at in '22. So in that light, the DKK 75 million, I mean, can you do more than that? And how much more do you think that you can do, without stretching the balance sheet too much? That's the first one.

We are very happy about that. We are starting the share buyback. And yes, if no big deals come up, then we will probably also start another share buyback, that's at least our history. So yes, we have a very healthy capital structure. And yes, you also saw we converted a lot of the results to cash last year. So we're very happy about our position and are ready to other -- utilize that.

Yes. And then a follow-up on that is -- I mean are you planning to cancel those shares? Or what is the plan?

We haven't any plans, but we also -- as you also saw with Ebrex, we were very happy to use it as a currency because then the former owners of Ebrex, they were then NTG partners, and we like that they are partners. So we don't have any plans, but we would be very happy to do an acquisition like Ebrex where a part of the purchase price was paid with our own shares. So we also like that opportunity.

Okay. And then the second question -- or the other question is regarding the markets, maybe touch a little bit more. On Air & Ocean, gross margin has been depressed because of the, I mean, historically high interest -- sorry, not interest rates, high rates is coming off now. So I don't know if you can help us in terms of guidance and give any indication what kind of impact on your gross margin will it have when the ocean and air rates expect to normalize and yields normalize during the course of '23?

That would be very difficult. We also know what -- don't know what the future rates will be, Lars. So it's just -- I would rather not give a guidance on that one.

The next question is from Ulrik Bak of SEB.

Yes. Also a couple from my side. So firstly, on your Road & Logistics conversion ratio and margins. I think you've done an extraordinary job achieving EBIT margin flat quarter-over-quarter and only slightly decreasing your conversion ratio, at least if you compare it to your global peers. But how do you explain this performance, would be the first one. And then in that connection also, will these margin levels conversion ratios be a sustainable target for 2023 as well?

But as you know, we have a brilliant staff and we have a lean back office and a good IT system. And that we will also still have in '23. So definitely, we will strive to keep it that way. So I don't know. We -- to be honest, and that you always also know, our focus is the EBIT and not the margins. We, of course, understand what drives the EBIT and use that for our internal business. But we also see sometimes that we have a development between some countries where you have a natural higher EBIT percentage than you have in other countries. So my focus will -- our focus will be on the EBIT and not on the margins. So I don't think I can elaborate any more on that.

Sure. Then a question on the Air & Ocean, like similar question, because here you saw a significant drop in both, yes, margins and conversion ratio. Just to be sure that there are no one-off-like costs in the Q4 or if you -- we should expect some sort of pickup because you've had a relative higher cost in Q4, which you won't have going forward.

No.

That's very clear. Then a question on your net working capital. We saw a significant improvement during Q4. Should we expect to see a further improvement during '23? Or has the majority of this normalization of net working capital already happened during the quarter?

I think you're a little greedy, aren't you? I think we're very happy that we are below 0 in our -- on our net working capital. I don't think there will be any -- I don't think we will be able to push it further.

Right. And then my final question...

Sorry. Net working capital is always at the bottom at the end of the year. So this is always our best -- our lowest net working capital.

Sure. That makes sense. Yes, final question. On your share buyback program, you mentioned that, yes, last year, you initiated a share buyback -- or you didn't initiate a share buyback program right after the Q4 report. And then a couple of weeks later, you acquired AGL. So in that sense, should we think of the current share buyback program as there will be no acquisitions just around the corner?

I would -- please, you can't -- I can't comment on the acquisitions and on the -- what's in the pipeline.

The next question is a follow-up from Lars Heindorff from Nordea.

Yes. Two questions regarding -- the first one regarding cost development. We are having sort of [ variant ] discussions with some of your competitors and peers regarding the cost development when volumes decline. This is particularly the case, I think, in Air & Ocean maybe, mostly pronounced. I don't know if you can give an update on -- if we do not see a volume pickup as you expect going to the second half, I mean, do you have contingency plans? Have you already started? Or are you doing something on the cost side already now? That's the first one.

Definitely have contingency plans in the drawer, but we haven't picked them up in group side. We expect our managers to adjust in what is necessary. But at the moment, we probably are not -- if somebody's [indiscernible] is not sure that we will replace the position as we might have done before. But we are not going out. We have the best employees in the industry, and we will not go out and lose some just in the same and we have, if the margin picks then, then we have to find that. So we are very happy about the Q1, but there has been already small adjustments and also people leaving us without being replaced. So that's what I can say.

Okay. And then a follow-up on the M&A. I know you can't say too much about these things, but maybe if I ask in a little bit different way. So I mean do you have any preferences? You earlier communicated that in terms of Air & Ocean acquisitions, you probably need to do and conclude the integration of AGL first before you can proceed with any other stuff there. So preferences on terms of maybe geographies and also which kind of what division where you have sort of most likely to do something and where you have the most appetite.

I don't think I've just said like you just said. I think we have said that you will not see a [ transformal ] acquisition within the Air & Ocean division in the size of AGL. We can definitely do some smaller acquisitions for the Air & Ocean division and I'm not defining how big they can be. So we are definitely ready in both divisions, but I don't think you will see an AGL just in the coming months. But -- yes. And we are very interested in acquisitions. We have also seen that the sellers are now coming a little bit down from the treetops they're sitting in and maybe we will now be able to meet each other a little bit easier in the near future.

[Operator Instructions] Mr. Jakobsen, there are no more questions registered at this time.

Okay. Thank you very much, and thank you for listening in. Looking forward to seeing you out there. Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.