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

Good morning. This is the conference operator. Welcome, and thank you for joining NTG Nordic Transport Group Full Year 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Michael Larsen, Group CEO. Please go ahead, sir.

Thank you. Welcome to our full year 2023 conference call, and thank you for dialing in. Let's move on to Page 2. I 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 Mike Larsen, I'm the Group CEO of NTD 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 fourth quarter and full year of 2023, a review of the financial performance of the group and the 2 divisions, a presentation of other key figures and finally, the outlook for 2024 as well as our midterm financial target. By the end of the presentation, the line will be open to questions from the audience. If we move on to Page #5. Here, you see the main highlights for 2023. 2023 was somewhat a different story than the previous period. Macroeconomic headwinds and geopolitical uncertainty prevailed during the year, causing changing and challenging market dynamics. In a market characterized by declining freight rates and downward pressure on volumes, NTG's scalable business model confirms its ability to adjust and adapt to a new market environment. Both divisions experienced a decline in organic growth and maintained focus on cost base reductions and sales force investments to adapt to the new market situation. The Road & Logistics division kept focus on contracted sales as they respond to the challenging spot market with lower freight rates. The Air & Ocean division faced a situation with declining freight rates and lower volumes due to the extended destocking cycle. Despite uncertainty and unpredictability and a performance delivering results at lower levels than in the previous years, we performed in line with our provided guidance. And I'm proud of the efforts made and the results delivered by our agile organization of competent and cooperative employees. With these words, I will now hand you over to Christian, who will take you through the financial results for 2023. Christian?

Thank you, Michael, and excuse my voice. I've caught cold, so I hope it's going okay. On Page 6, you see the main financial highlights for the group. Net revenue for the full year 2023 sits at DKK 8.3 billion, representing a decrease of 18% compared to June. Organic growth contributed negative 19%, driven by lower freight rates and activity, while acquisitions contributed with 3.7%. Currency effects had a negative impact of 1.8% in 2023. Gross profit decreased 7.3% to DKK 1.8 billion, corresponding to a gross margin of 22.4% versus 19.7% in '22. The positive effects of -- and revenue had a positive effect on the gross margins. Adjusted EBIT decreased 17% to DKK 630 million in '23. The sustainable level of operating margin was supported by the cost discipline demonstrated throughout the year, and of course, the earn-out release of DKK 49 million related to the AGL acquisition. And if we move to Page 7, you see the 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, in comparison to period last year, primarily due to the lower rates, which supported a higher gross margin. In the middle of the slide, you see the conversion ratio, which increased compared to last quarter and the same period last year. The main development was mainly [indiscernible] we don't really see it. And then if you move to Page 8, you see the financial revenue for the Road & Logistics division. The division generated a net revenue of DKK 6.2 billion in 2023, 9.7% in the same period last year. The decrease was mainly related to organic growth, contributing a negative 8.6%, driven by reduced spot market activity and prices and lower fuel value. FX effects had a negative effect of -- on growth of 2% during the year. Gross profit decreased 4% to DKK 1.4 billion in 2023, corresponding to a gross margin of 22.3% versus 21% in 2022. Adjusted EBIT decreased 14% to DKK 467 million, corresponding to an operating margin of 7.5% throughout the year. The division adjusted capacity and the cost base in response to the market complications. And if we flip to Page 9, you see the financial revenue for the Air & Ocean division. The division generated a net revenue of DKK 2.1 billion in 2023, a decrease of 36% compared to 2022. The decrease was mainly driven by negative organic growth of 14%, partly offset by the acquisition growth of 10% related to the full year effect of AGL acquisition completed in May 2022. Gross profit decreased 15% to DKK 480 million, corresponding to a gross margin of 22.6% in '23 compared to 16.9% in '22. The margin development was mainly related to the significant decline in freight rates compared to '22. Adjusted EBIT decreased 24% to DKK 167 million (sic) [ DKK 163 million ], corresponding to an operating margin of 7.7% versus 6.4% in '22. The main margin development was positively impacted by the DKK 49 million earn-out provision release we did in the year. And then if we go to Page 10, you see an overview of other key figures. On the left, you see that the net working capital decreased to minus DKK 209 million as per 31 of December 2023, a decrease of DKK 158 million compared to the end of Q3. The adjusted cash flow of a total DKK 243 million in the fourth quarter of the year compared to DKK 263 million in the same period last year. Finally, on the right-hand side, you see that net interest bearing debt, excluding IFRS 16, which totaled DKK 103 million by the end of 2023. And if we move to Slide 11, you see the full year outlook for 2024, where we expect an adjusted EBIT in the range of DKK 500 million to DKK 580 million. The outlook for 2024 assumes an overall flat market environment with soft macroeconomics and continued muted consumer confidence. The Road & Logistics division is assumed to persist in the current market environment for 2024 with low freight rates, soft volumes and challenging spot markets. The Air & Ocean division is assumed to remain in the current market environment, the low freight rates and oversupply of freight capacity, which have an adverse impact of proposed freight rates and yields. We continue to closely monitor the activity and adjust capacity and cost base accordingly. The outlook for 2024 includes the effects of the acquisition of RTC Transport as of February 2024. This transaction was closed in the 14th of February 2024. The outlook does not include potential impact from other acquisitions during the year, if any. Currency exchange rates, I assume at current levels because of the financial and geopolitical uncertainty remain high, the assumption underlying the outlook may change. In addition to the full year outlook for 2024, we maintain 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 an EBIT of DKK 1 billion. 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 raises is included, although we will evaluate a source of financing for larger 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 on the M&A agenda. And that was all what we had planned for today. So moderator, please open the line for Q&A.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Lars Heindorff of Nordea.

Yes, ma'am. If I can start out in the Air & Ocean, I want to get a better feeling for the organic growth, to what extent that is caused by the ongoing rate declines? And to what extent it is caused by volumes? So maybe if you can help us out a little bit there because the magnitude and the speed of the decline is still pretty hefty in light of what we see by some of your competitors. So that worries me a lit bit to be honest. That's the first one.

I think we have already spoken about our challenges in Germany. So that means that there we definitely lost some market shares there. And overall, we are feeling the pressure of the soft freight for water. Of course, a part of it is the volumes. And now, shocking, [indiscernible] order coming with that. So I don't think we're that much behind. But you're right, we have definitely lost something compared to the bigger freight for waters.

And Germany -- how much you bet can you remind me how much does Germany account for maybe I don't know in terms of volume or revenue of the Air & Ocean?

I don't think we're giving any flavor on that.

And then the second part is still on the Air & Ocean. It's on the cost side. If I adjust for the earn-outs and the reversal of that in the, kind of, both in the third and the fourth quarter, it appears that at least in terms of cost base that you've been able to reduce the cost base to -- a little bit. Is -- I mean, what -- how should we think about the costs going into '24? Is this sort of a run rate here? We're talking about sort of low 80s in tens of million DKK in quarterly costs compared to which is a little bit down from above DKK 90 million on a quarterly basis in the first 2 quarters last year. And how should we think about the cost base for '24?

We have also made some new start-ups and that will affect our cost base. I think we've been talking about this new start-up with the U.S., Germany, and that cost base will at least be 20 people in the first quarter. So you will see our cost base, of course, with declining in the rest of the business, but you also see the start-up that we had in U.S., Germany, but we also see that we have opened new offices, as you can call them start-up within the organization in the U.K. So there you will also see us investing in new start-ups. So I don't think you will see a decline because that will be countered by the increase of staff with the startup.

Okay. And then back to the situation in Germany. You've had a very significant amount of changes in the staff down there. I mean just sort of sit down, is this something which is going to work out? I hear you hired a new -- some new employees. And hopefully, you will fix this and solve some of the problems. But how long will it take and how much patience do you have with that turnaround, which it appears that we're still waiting for in Germany?

We definitely have patience, and we have the right management team, and we have done the right things, and we just cause some cost adjusted to the situation. But yes, we are hit and we are according to meet the challenges we had there. But yes, hopefully, we are now in a stable situation in Germany.

Okay. And then the last one and I'll hand over is regarding the gross margin in the Air & Ocean still. Close to 25% in the fourth quarter, of course, supported by the lower rates, I think. I think you had earlier mentioned that adjusted for AGL, you expected to hope that you could get back to the sort of 24%, 25%-ish level in terms of gross profit margin in the Air & Ocean part business. Is that still the case?

I think we have an okay gross margin. I think what we're missing is the number of consignments.

The next question is from Dan Togo of Carnegie.

Yes. Thank you. A couple from my side as well. Firstly, on the financial cost in Q4, seems to have taken a step up compared to previous quarters. Could you shed some light on what's driving the higher financial costs in Q4 particularly and also relating to the development here compared to Q3. I understand that the earn-out has increased a bit. Previously, you guided for DKK 42 million, now you guide for DKK 49 million. What is reflected here in order to understand the dynamics behind ATL at the moment? Let's start there, and then I have another one afterwards.

Financial, we have this earn-out that we need to pay out in -- to ATL. And therefore, we have some dollar, in the Danish company, which -- where you saw a spike in end of Q3 and now you're seeing that it has lowered throughout this year. So it is -- we didn't change them to Danish Krones because we should pay them also. So that is some of the reasons. Then we have been hit by the Turkish lira. And then we have been hit by the Polish and the Swedish Krona. So all purges have been a little against us in the quarter. And then on top of that, you know this -- that you have some internal balances where one of them in the parent company would be on the P&L and the other one will be on the equity of the group. So it is not a running rate. It is mainly due to all currencies being cases. We had some positive in Q3. So I think now that it's equal though. And of course, that's how it is. And then on the earn-out, yes, it was simply because ATL didn't meet their budget and expectations for Q4. And therefore, the earn-out would be a little bit lower, and therefore, we reversed it. So that's the reason.

And then you maintained your DKK 1 billion EBIT target for '27. And it's, of course, understood that you need to make some acquisitions in order to reach that. Could you share some thoughts around how you see that developing? What are we looking at here in terms of M&A activity? In terms of size of companies, what do you see yourself having in firepower and which activities in particular? Will it be primarily Road Europe or U.S. sea? And just some thoughts, whatever you can share.

Yes, yes. If I start with buying power, you can -- we have said up to 3x EBITDA, and then you can see that we were close to 0 with excluding IFRS 16, and then you have the other one, including IFRS 16. So there you can do the math pretty easy yourself what we see in buying power. And we have good -- we have made some air. We are definitely seeing that that market is getting more interesting for us. We have seen that the sellers climbing out from the trees and being willing to do deals not on '22 or now we're talking about what is happening in '23. So yes, fortunately, this very, very high EBITDA and then you have to multiply on top of that. That is normalizing and that should make it easier for us as a company to do acquisitions in the coming time.

And then just a final one on the growth expectations. I understand your guidance is based on basically, yes, more or less flat volumes, but still you invest in the business with these hires you've made, et cetera. I expect you must assume some sort of contribution from these investments, i.e., higher growth throughout the year. And will this growth be more back-end loaded, hence, H22 somewhat above H1?

Definitely, you always see that our start-ups, they take normally 6 to 12 months before they are coming into profit. So definitely, that will be back loaded to the year. But please remember, the reason why we have had sort of higher organic growth in all years, except from 2024 will be that we have done these -- both startups and acquisitions. And therefore, we need to -- we will keep doing this also for the future, even though that we know that will cost something on our EBIT in the first -- in a certain period until the breakeven.

But just to understand, so the DKK 580 million top end of the guidance range, that assumes some healthy growth in second half. Is that the way we should interpret it?

We are not giving more flavor on that, Dan, sorry.

The next question is from Michael Rasmussen of Danske Bank.

First of all, if you could comment a little bit about the current environment in the markets, both kind of on an underlying European basis but also if you could talk a little bit about the Red Sea situation, is that something you see as a headwind for your business right now? So that's my first question.

If you look at Europe, I think everything is new goals. I think we saw that the German [indiscernible] said that the number of trucks in Germany was down about 1.6% compared to a very low '23. So it seems like it's still very muted out there. I mean, the Red Sea, now you're seeing all rates are going down again, and it's a new normal. And to my knowledge, I think we have -- that there's not capacity for the freighters. And that means that we would probably see that as, yes, of course, a little positive for the prices. But it is a new normal. We don't see a big uptick as you saw with the corona based on the Red Sea prices.

So on the Road business, within which areas do you perform particularly well right now? And maybe also if you can make a comment on which areas are more problematic for you right now?

Well, there's no doubt that the pressure with the macro in Sweden and Finland is, of course, also putting pressure on our business. And so I think in general, we are handling it very well. But if I should say something special in which it is technically under pressure in Sweden. And then, of course, in the Baltics, it's not -- it's a small area, but we are also hit by the [indiscernible] macro.

And can you add some comments on the verticals? Are you seeing any improvements in, for example, automotive or other verticals that are worth mentioning?

To be honest, I don't have a big analysis from January. So -- and yes, February just ended. So I don't have any flavor on the verticals at the moment. It seems like, yes, the furniture vertical is going maybe a little bit better than expected, in particularly our Danish furniture company is doing very well. They also won new market share. So what is the market and what is just new, well that hard for me to say.

Okay. And just a follow-up on the M&A questions already asked. So should we see it as an indication of something larger coming right now since you haven't announced a share buyback given the low leverage.

We are very happy about our capital structure, and we feel that we have shares. We still have active portion of own shares, and that means, yes, we are happy about that situation at the moment.

The next question is from Ulrik Bak of SEB.

Just a few questions from my side. In Germany, in December, there were these new MAUT fees introduced. And just any color you can give about how the market dynamics have changed and how much prices on average have increased, and how we should think about the Road gross margin in this context?

The MAUT increased 80%. So, I think that for us, most of that has been passed through to the customers. So, yes, that for us, it's a pass-through. So, we would probably see that it's -- it won't affect our gross profit in big numbers. I don't think people will be able to see that.

But it would be a fair assumption that your gross margin should then decrease on the fact of this from Q1 and onwards.

I would see a small increase in the turn of one and will see probably a fixed gross profit.

Then my second and final question is that I understand that you have a fairly large exposure to Christmas tree customers in Road in Q4, and this may also explain the relatively strong Q4 result in Road. But can you perhaps disclose the volume growth for these particular customers versus the rest of the Road business?

I think you're exaggerated. I think you used it as an example of seasonality that Christmas trees -- are always Christmas trees in Q4. So it's not that big. It is a smaller one. It was just to explain that you have some volumes with Black Friday. You have Christmas trees and we have a higher market share of Christmas trees. So, yes, it is not something where you could see that on our full result for the quarter. It is just an example. Christmas trees not a big -- it doesn't qualify for a vertical.

This was the last question. Mr. Larsen, back to you for any closing remarks. I'm sorry, there is one follow-up just registered from Lars Heindorff of Nordea.

It's regarding the recent LGT acquisition that you made. Maybe you can give us a status on that and particularly how the Swedish operations are doing? Yes, that would be my question.

Sorry, I didn't understand the last part.

The recent acquisition you made last year in LGT, the status on that, how it's -- actually how it's progressing? I understand that you've had a little bit of headwind at least in Sweden. So maybe a status on that one.

I'm not 100%. It is based in Denmark. So it is we have said that we want to grow out to Sweden, but they are still only based in Denmark. So yes, we are -- we have just started the integration process with the rest of the NTT Group, and that means that we are now implementing, of course, we are finding the synergies, the cross sales synergies and so it has just, but please remember, we closed the deal on the 14th of February. So it's really early days, but we definitely have a good plan, and we need to execute on that.

Mr. Larsen, back to you for any closing remarks.

Thank you very much, everybody, for your time. And yes, have a nice day. Thank you.

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