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 Second Quarter 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Michael Larsen, Group CEO. Please go ahead, sir.

Welcome to our Q2 2023 conference call, and thank you for dialing in. If we move to Page #2, we kindly 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, I'm Group CEO of Nordic Transport Group. And with me today, I have Christian Jakobsen, our Group CFO. Let's move on to Page #4. Here, you see the agenda for this conference call, which includes highlights for the second quarter of 2023, a review of the financial performance of the group and the 2 divisions. A presentation of other key figures and the updated outlook for 2023 and the reiteration of our mid-term target. By the end of the presentation, the line will be open to questions from the audience. Let's move on to Page #5. These are the main highlights. In the second quarter of the year, the market conditions continued to be challenging, especially in the Air & Ocean division. Inflation is still high, although it's declining. Interest rates have continued to rise during Q2, and consumer confidence remains muted. As a consequence, volumes are still relatively low and there is still an overcapacity in the market, which increases competition and puts prices under pressure. This dynamic has translated into a continued decline in organic growth in both of the divisions. Air & Ocean remains the most affected due to the low freight rates and slowdown in volumes. In the Road & Logistics, the spot market is still weak and fuel prices further contributed to the negative development in revenue. In general, the market has moved more towards the normal and the division delivered a solid result with a quarter-on-quarter increase in the operating margin. In Air & Ocean, the destocking cycle is still more persistent than first expected and continues to create a drag on shipping volumes. In addition, the macroeconomic environment further contributes to negative development in the volumes. Finally, the lower-than-expected level of activity for Q2 and July led us to update our full year outlook on 3rd of August 2023. So the guidance now reflects an adjusted EBIT between DKK 600 million and DKK 650 million for the full year of 2023. With those words, I'll now hand you over to Christian, who will take you through the Q2 financial results. Christian, please?

Thank you, Michael. On Page 6, you find the main financial highlights for the group. Net revenue for the second quarter of 2023 totaled DKK 2.1 billion, which is a decrease of 22% versus the same period last year. Organic growth contributed with negative 24% due to the challenging market environments for both divisions, while currency translation effects had a negative impact of 1.8%. Gross profit decreased by 10% to DKK 482 million, corresponding to an increase in gross margin from 19.5% to 20. -- 22.7% year-on-year. Adjusted EBIT decreased 32% to DKK 148 million in the second quarter, corresponding to an operating margin of 7% versus 8% in Q2 2022, reflecting lower conversion ratios in both divisions and especially in Air & Ocean compared to last year, due to the lower total gross profit and continued investments in our sales organization. To counter the decline in the conversion ratio, both divisions have implemented cost reduction measures during the quarter, mainly by reducing white-collar headcount. And if we move to Page 7, you see a summary of the key financial performance indicators. As illustrated to the left, the gross margin development for the group was mainly impacted by an increase in both divisions when compared to last quarter as well as the same period last year, primarily due to lower rates, which allow a higher gross margin. In the middle of the slide, you see the conversion ratio, which decreased compared to last quarter and the same period last year. The development was driven by a combination of lower revenue and consequently, lower gross profit despite higher gross margins. And fixed cost was decreased less than gross profit due to continued investments in both organizations. As mentioned earlier, both divisions have reduced capacity and white-collar headcount in order to react to the market conditions. On the right-hand side, you see the development in the operating margin, which declined 1 percentage point compared to the same period last year, but increased compared to last quarter. The year development is mainly driven by the Air & Ocean division, while the Road & Logistics division managed an increase in operating margin from last quarter and realized a solid margin of 7.9%. If we go to Slide 8, you see the financial review of the Road & Logistics division. The division generated a net revenue of DKK 1.6 billion in the second quarter, which was 12% below the same period last year. The decrease was mainly related to organic growth, which fell by 10% year-on-year, driven by a combination of lower rates in the spot market, lower fuel rates and lower volumes mainly in Sweden, while Continental Europe was more robust. Finally, currency translation had a negative effect of 2%, especially the devaluation of the Swedish krone, which has a negative impact of DKK 59 million. Gross profit decreased 6% to DKK 360 million, corresponding to a gross margin of 22.9% versus 21.5% in Q2 '22. The conversion ratio decreased by 5.3 percentage points year-on-year, mainly due to the combination of lower gross profit and continued investments in the sales organization. Adjusted EBIT decreased 18% to DKK 124 million in the second quarter, while the operating margin declined to 7.9% from 8.5% last year, but reflecting a quarter-on-quarter increase up from 7.1% in Q1 2023. As in Q1, the division adjusted capacity and the cost base during the quarter is in response to the market conditions. And if we flip to Page 9, you see the financial review of the Air & Ocean division. The division generated a net revenue of DKK 546 million in the quarter, which was 43% lower than the same period last year, composed of organic growth of negative 49%, mainly driven by the continuing destocking cycle and lower volumes. The acquisition of AGL contributed with 8% being included in organic growth with 1 month June this second quarter. Gross profit decreased 18% to DKK 122 million, corresponding to gross margin of 22.3% versus 15.7% in Q2 2022. This development was mainly due to the sharp decrease in freight rates compared to last year. Adjusted EBIT declined 63% to DKK 24 million, corresponding to an operating margin of 4.4% versus 6.7% in Q2. The margin increase was driven by a conversion ratio development of negative 23 percentage points due to the lower absolute gross profit and continued investment in sales, though partly offset by further cost reductions in the division. And if you flip to Page 10, you see an overview of all the key figures. On the left, you see the net working capital increased to minus DKK 73 million as per June 2023. The quarter-on-quarter development in net working capital was impacted by the ongoing merger of 4 mature subsidiaries in Sweden, where suppliers were paid up front during June. The adjusted free cash flow totaled DKK 28 million in the second quarter of the year compared to DKK 153 (sic) [ 152 ] million in the same period last year, driven by lower operating performance and an increase in net working capital. Finally, to the right, you see the net interest-bearing debt, excluding IFRS 16, which totaled DKK 361 million by the end of Q2 2023. And if we move to Page 11, you see the updated full year outlook for 2023, which we announced on the 3rd of August 2023. And for the full year of 2023, we now expect an adjusted EBIT in the range of DKK 600 million to DKK 650 million. The updated guidance is a result of the lower-than-expected results during Q2. Especially in June, the activity was lower than we expected, which continued into July. The updated outlook assumes that activity will pick up gradually during the second half of the year and that market conditions within Road & Logistics remain stable. Finally, the outlook assumes that the Air & Ocean market will remain challenging with low rates and soft volumes. While we updated our full year outlook for 2023, we maintain our midterm financial target that you see on Page 12. No later than end of 2027, we strive to achieve DKK 1 billion in adjusted EBIT. The target is based on a combination of organic growth and M&A, financed by our cash flow and credit facilities. No assumptions of capital rates is included, although we will evaluate the source of financing for large acquisitions. Finally, the midterm target assumes no additional material adverse events affecting regional and global cargo volumes and trade balance, and NTG continuing to develop the business, establish new start-ups and execute its M&A agenda. And that was all what we are planning to do for today. So moderator, please open the line for Q&A.

[Operator Instructions] The first question is from [ Stan Jensen ] of Carnegie.

Yes, Dan Togo here from Carnegie. Firstly, on your guidance, you seem to imply that the second half will be stronger than the first half. And when I look into, for instance, your peers like [ DSE ], they are a bit more cautious to have such a claim. Can you please explain, because I don't expect them to have different seasonality than you may have? And you're also highlighting here that well, the usual peak season is not really happening at the moment. So what exactly is it that we should look out for that takes second half above first half? That would be the first question.

Please bear in mind that we have -- our biggest division is the Road division and as you see the seasonality where we normally see that with Black Friday, Christmas and everything and Christmas treats all these things that we have in our Road division, we are normally seeing that -- this seasonality, and we still even though that the market is soft, we still expect the seasonality to come again.

Okay. And -- but are there other impacts, I guess, because that probably feeds into my next question on the acquisition of AGL. One of the disappointments, at least compared to my estimate here in Q2, was definitely in the Air & Sea. And then, can you give us some comfort in the way that AGL is developing and whether it's on track and whether the underlying development will have any impact on the earn-out?

Yes. What we have been, of course, we're in contact with the MD of AGL. And he still believes that he will reach his full earn-out, and you know we have made it as a stair. So it might not be that he comes to the last step on the staircase, but definitely, he will probably come very close if he's not reaching the staircase. So we believe that he will still reach it. And please, when you see our figures, it is including group costs and other things. So you can't compare it 1:1 with what -- but also, please remember what we earned last year and so on. So still, it looks a little bit lower than it really is. And actually, we are -- we have been investing in also when all the issue should -- we have been investing in new sales persons in our organization, and we expect also that we will benefit from that. And we also have reduced our summer staff in June and July, where you will also see an effect of that in the second half. So besides the normal seasonality, that will also, we expect some effects from that.

Can you also share some light on the sales organization. You are in the midst of ramping this up, and that is also triggering additional cost, I guess. Can you share a bit color here? How big is the sales organization now versus the start of the year or maybe compared to when you took over AGL?

I don't think I will give you any specific details on that, but I can say that in the Air & Ocean division, all countries have at least 1 extra and some of them have more than 1 extra in the sales organization. So we definitely also expect that they will bring some new business to us.

Okay. And then just a final question here on the M&A side. You highlight that price pressure has been quite wide due to the recent strong performance, and now they are more aligned. Given the underlying operational performance, would you rather now have a broad acquisition than an Air & Sea acquisition? I don't know if you can give some color on how you see this developing, and how close you are to making a transaction here in the next, let's say, 6 to 12 months?

I can't give you an answer on the last question, you [ know ] that. But I can say that you're right. We would like that we have our CargoWise 100% implemented and the full setup before doing bigger acquisition within the Air & Ocean. But still, we are following the plan for rolling out our CargoWise to our countries. And that plan means that we should end -- be finalized in June next year. So that means we could buy a company, but still, we would like that we have a clear plan for rolling out very fast to our group systems when we're doing the acquisition. So I think, of course, we would. But we will not say that we won't buy anything in the Air & Ocean, but I'll probably be a little bit more eager to buy something within the Road at the moment. But post the visits we could do the acquisitions. But yes, to be honest, we are very eager to do -- to buy acquisition, to find the right acquisitions in Road.

The next question is from Michael Rasmussen of Danske Bank.

A few questions from me. I'll take them one by one. First of all, do you believe that you've grown in line with the underlying markets or above or below, if you could just go through both Air & Ocean and Road, please?

Now I haven't started all our competitors at DB, but it seems that from Road, please remember, we had benefited a lot and did a lot on the spot market last year. We're not [ operating ] that anymore. So we are probably declined a little bit more in the Road than that. But also, we have also won a good fixed contract. So probably it is very close to what the market has, I believe. Also, please remember that geographies we are operating. We have a lot of trucks coming to Sweden, and Sweden has been a very difficult market this year. So I don't have the country-specific numbers for our competitors. But we're close to being in line with the others. And I think Air & Ocean, we have declined a little bit more. We are based on -- we are relying on the spot market, and the competition in the spot market is just very fast and they are asking more suppliers for rates. And yes, then I think it's more volatile than you see on the fixed market. So there, we probably have lost a little bit more than the competitors. But we can only see the big competitors and they are operating in another market for the Air & Ocean.

Just to follow up on that, because one thing being your larger competitors on the forwarding side, what about the asset owners that either have their own capacity or have either leased planes or vessels? Are they kind of dumping the market right now? Are they behaving relatively rational in both Air & Ocean?

Please also bear in mind, we are not comparing. They are competing about the big clients with the big freight forwarders. I think there, we're not seeing them a lot on the smaller customers that we are [ operating ]. I think they are more focused on the segment of the big cars and not the SME segment. But I think honestly, I can't answer that [ mine ], sorry.

So just thinking a little bit forward here. So obviously, the pickup comes a bit later than you had hoped for and you're definitely not the only ones sharing that. I believe it's very much the same as we're seeing from [ DSE ] and Maersk today. But just thinking forward, so do you believe that this will end up with actually volume-wise 2024 being a relatively good year?

That was a good question. To be honest, we have not started thinking about 2024. We have -- we will start the budgets very soon. So I don't have an opinion about that yet. We have -- yes, we just came out with a new guidance and had to work on our Excel sheets through and so on. So I think it's a little early for us to have an opinion about 2024 at the moment.

Okay. Just a final question in terms of both [ pads ] and also kind of what are you seeing there and anyone coming up for exits? And I believe that you will also see some new shares being available for sale at the anniversary of the IPO later this year. Anyone that has been ringing the bell or anything we should be aware of here?

I don't think we have any news to report there.

The next question is from Ulrik Bak of SEB.

Michael and Christian. A couple of questions from my side. Firstly, the quarterly result was obviously affected by the challenging conditions in your Air & Ocean division. But can you perhaps provide some color on the underlying dynamics in each of these 2 segments? How did volumes develop, how did deals develop and also what were the exit rates heading out of the quarter compared to what we saw as the average for Q2?

I think we saw volumes decline, and we also saw yields decline in the Air & Ocean. And then, we also saw that prices also on fixed contracts were going a little bit down in the Road division in Q2, so -- and we have been out -- and then please remember that diesel was -- there was no diesel additions in Q2 almost. So you also saw that affecting the Q2 for the Road division.

Okay. But any color whether Ocean volumes were down less than Air, like we've seen from some other of your competitors? Any flavor here?

I don't think we would -- I would prefer not to comment on the volumes in the 2 -- in the division as we are in the middle of implementing CargoWise and that also means that we need to be 100% sure that it counts the same way as it did before. So I would prefer not to give you any colors on that until we have CargoWise fully implemented, and we know we are comparing apples with apples.

Okay. Understood. Then to the absolute earnings in Q2 in Air & Ocean. That is roughly on par with what you earned in Q2, 2 years ago in '21, before your acquisition of AGL. And I know that such comparison may not be fair if you've invested a lot in the organization, volumes have more or less disappeared. But to put these organizational investments into perspective, could you perhaps talk about how much more volumes that the ones you saw in Q2 your current Air & Ocean organization will be able to handle compared to what you saw in Q2? Is it 10% more, 20% more, 30%, just to get a feel of when you would need to invest more in the organization?

It is also depending from country-to-country. Some countries have already cut the staff and some have -- are still expecting. And please remember, it's also -- if you have 2 people in small organization there were also a little bit from our subscale that it would be difficult, because it has to have a replacement for holidays, and people are sick. So it is really difficult to give you a flavor. But I'm sure that if we are increasing the volumes with 10%, we don't need to add people in general and some places we might also be able to do it with 20%. So it is difficult to do it. And what we are doing, we are setting and having these conversations on department by department, because even though that you have it's often different people that makes sea export and sea import or air export and sea export. So that will often be 2 different departments and 2 different -- so you can't just -- you have to do it department-wise and therefore, it is really difficult for me to come with a figure. But definitely, I think, if we are increasing with 10%, we don't need to adjust anything. And some locations, we can also adjust, put 20% more. And then also, we are also expecting productivity increase from CargoWise. So when they are just getting used to CargoWise and then, we also expect to see an improved productivity in the different countries.

Great. That's very clear. And then, perhaps some color on the new AGL organization versus the old entity Air & Ocean. Have they performed differently during Q2? You allude to that the MD of AGL still believes that they could end and then meet the earn-out targets. So it seems as if the old Air & Ocean of entity may have underperformed slightly? Or is that a correct interpretation?

I think it would be fair to say that, but it's also different. You can't just take the old [ Air and AGL ] organization and put them together as one. But it is fair to say that AGL has performed better than the combined former NTG organization throughout the quarter. But we also have -- still have countries that have performed very well in the second quarter, or will at least in our Air & Ocean division. So yes.

All right. And then my final question is to your guidance. So what needs to happen for you to reach the upper and lower end of your guidance? Is it primarily in Road that's going to move the needle? Or is it also Air & Ocean, even though it's not that big earnings-wise compared to the group?

I think we definitely believe that Air & Ocean should also be better than what we saw in Q2, for sure. And as I said, we need to see some effects from the sales investments to reach the top. And then, we also see, have to see that the market is not giving us that much headwind as we feel we experienced.

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

Okay. Thank you very much. Thank you for listening in, and we will be happy to see you again on the next call. Thank you very much.

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