NTG Nordic Transport Group AS
CSE:NTG
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NTG Nordic Transport Group AS
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Good day, and thank you for standing by. Welcome to the Nordic Transport Group Q3 2021 Analyst Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand the conference over to your speaker today, Group CEO, Michael Larsen. Please go ahead.
Thank you. Welcome to our Q3 2021 Conference Call, and thank you for listening in. If we move on to Page 2, we kindly ask you to read the important notice provided in this slide. Let's move on to Page #3. Here, you see the presenting team of today. My name is Michael Larsen, I'm the Group CEO of NTG 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 the highlights for the third quarter, a review of the financial performance and other key figures and the latest full year outlook for 2021. 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 for the third quarter of 2021. The logistical challenges that had affected global supply chains in the first half of 2021 continued into the third quarter of the year. And while the Air & Ocean freight capacity continues to be tight, increasing shortages of truck, truck drivers reinforce the market imbalances in the Road & Logistics. But thanks to valuable efforts of our employees navigating in the increasingly complex and challenging markets, we managed to maintain momentum from the previous quarters. And we realized double-digit growth in both revenue and adjusted EBIT in Q3 2021. Although gross margins in both divisions were affected by the current market situation, the operating margins improved in Q3 2021 compared to the same period last year thanks to increased efficiency, scalability and the effects of activities discontinued in 2020, which all together drove up the conversion ratio in both divisions. During the third quarter, we also announced the acquisition of LGT Group, which we closed on the 1st of September this year. We expect annual synergies of approximately DKK 10 million from the acquisition with full year effect from 2023. Finally, the strong financial results also led to an upgrade of our full year outlook on 11th of November 2021. The guidance now reflects revenue between DKK 7 billion and DKK 7.3 billion and adjusted EBIT between DKK 520 million and DKK 550 million for the full year of 2021. With these words, I'll now hand you over to Christian who will take you through the financial results for the Q3. Christian?
Thank you, Michael, and also welcome from my side. It's a pleasure to present such nice numbers. On Page 6, you see the main financial highlights for the group, where revenue in Q3 totaled DKK 1.9 billion, up 37.2% versus the same period last year. The positive development in organic growth continued in Q3 with an increase of 24.8% compared to Q3 2020, mainly driven by higher rates in both divisions but also increasing volumes compared to the same period last year. The effects from acquisitions within Road & Logistics contributed with 12.2% for the quarter, and gross profit increased 25.5% to DKK 399 million, corresponding to a gross margin of 21.3% versus 23.3% in the same period last year. The gross margin development was primarily driven by the Air & Ocean division where increasing pass-through revenue caused by elevated freight rates, reduced gross margins in the third quarter. Adjusted EBIT increased 83.8% to DKK 143 million in Q3, corresponding to an operating margin of 7.6% versus 5.7% in Q3 '20. The development was driven by increased efficiency and scalability as well as the effect from acquisitions and activities discontinued during 2020, which altogether led to a conversion ratio increase of 11.4 percentage points in Q3 '21. And then if we move to Page 7, you see the summary of the key financial performance indicators, which illustrate that the gross margin development for the group was primarily driven by the development within the Air & Ocean division in Q3 '21. However, increased efficiency, scalability and effect from activities discontinued in '20, more than offset the gross margin development in the Air & Ocean division, and supported the positive trend from previous quarters in the division's operating margin. When you look at the operating margin and conversion ratio for the Road & Logistics division and for the group in the second quarter of '21, please keep in mind that these numbers were positively affected by the one-off effect from a contract termination of the logistics facility in Switzerland. And adjusted for that, the conversion ratio and operating margin increased both for the division and for the group in Q3 versus Q2 '21. And then if we go to Page 8, you see the financial review for the Road & Logistics division. The division generated net revenue of DKK 1.4 billion in Q3 '21, which was 23.6% above same period last year. The increase was primarily driven by the effects of our latest acquisitions that contributed with 14.8%. And organic growth for the quarter of 8.7%, which was driven by the effects of surcharges introduced to safeguard existing capacities and customer relationships but also increasing volumes and spot prices. Gross profit increased by 21.4% to DKK 312 million, corresponding to a gross margin of 22.4% versus 22.8% in the same period last year. The gross margin development was primarily driven by increasing cost of recurring capacity, although the acquisition of LGT Group and capacity surcharges had a partially offsetting effect. Adjusted EBIT increased 44.8% to DKK 107 million in Q3, corresponding to an operating margin of 7.7% versus 6.5% in Q2 2020. The development was driven by increased efficiency, scalability, effects of activities is continued in 2020 and the effects of acquisitions completed during the last 12 months. Altogether, these effects resulted in a conversion ratio increase of 34.2% in Q3 '21, which more than offset the gross margin development. And then if we flip to Page 9. You see the financial revenue for the Air & Ocean division. The division generated a net revenue of DKK 477 million in Q3 21, which was 101.9% above the same period last year. The organic growth of 101.4% was mainly driven by significantly higher rates, and to some certain extent, volume increases. Gross profit increased 41.7% to DKK 87 million, corresponding to a gross margin of 18.2% versus 25.9% in the same period last year. And as I've mentioned before, the development was a result of innovative freight rates that resulted in increasing pass-through revenue, which drove gross margins lower in the third quarter. Adjusted EBIT increased 875.7% to DKK 36 million, corresponding to an operating margin of 7.6% versus 1.6% in Q3 2020, primarily driven by increased efficiency, scalability and the restructuring activities financed in 2020 that contributed to a conversion ratio improvement of 35.6 percentage points, which led to the operating margin increase of 6 percentage points. And then if we flip to Page 10, you see an overview of the other key figures. On the left, you see the net working capital increased slightly to minus DKK 139 million as per 30th of September, mainly driven by the growth in the Air & Ocean division, but also the effects of the acquisitions. The adjusted free cash flow totaled DKK 76 million in the third quarter as illustrated in the middle and compared to the same period last year. The development was a result of the improved operating performance in Q3 '21. On to the right, you see the net interest-bearing debt, excluding IFRS 16, that increased to DKK 41 million by the end of the quarter as a result of the closing of the acquisition of LGT Group. And then finally, on Page 11, you see the full year outlook for '21, which we announced on the 11th of November. And for the full year of '21, we now expect a net revenue in the range of DKK 7.0 billion to DKK 7.3 billion, and an adjusted EBIT in the range of DKK 520 million to DKK 550 million. The guidance includes the total net one-off effect of DKK 30 million from the lease agreement termination in Switzerland in Q2, and the expected effects of acquisition already closed.on the right-hand side, you see the assumptions underlying our guidance relating to the current market conditions in both divisions. And now I will hand back to Mike for closing remarks.
Thank you, Christian. As I mentioned in the beginning, global supply chains continued to be affected and challenged by market imbalances in both our divisions in the third quarter of the year. But thanks to our hardworking employees and our agile business setup, we managed to maintain momentum and continue our growth journey into Q3, which, of course, we are very proud of. So this was all we have planned for today. So moderator, if you could please open the line for Q&A. Thank you.
[Operator Instructions] And the first question comes from the line of Michael Rasmussen from Danske Bank.
Guys, well done on some great results once again. I would like to start off with 3 questions, please. First, Christian, can you please comment a little bit on your margin assumptions? You guide for midterm margin assumptions of 4% to 5%. And you are well ahead of that this year. Is this an indication of you expect margins to go down rather dramatically in '22 and '23 since you maintain these midterm targets? So that's my first question. My second question is on organic growth in the Road's business, which was a tad slower than both -- I had expected. But also slower than DSV reported in the organic growth for the third quarter, which was actually a surprise to me. I guess that automotive has been a drag, but are you also seeing some impacts from the Danish legislation, i.e., that you don't have the return volumes that you used to have? My final question is just on the gross margin in the Road business. That seems to have been kind of stabilized right now. Is this an ongoing level we should expect going forward? Or do you see any downside risks to the gross margin in Road, please?
Thank you, Michael. And you're right, our midterm guidance is up for renew. We have said a little bit earlier that we want to beat our targets before setting new targets. And last year, we -- I think we came out at 4.9%, and that means that we didn't beat it last year, hopefully -- and we strongly believe that we will beat them this year. And then we will, of course, review them. So you should expect us to review our midterm guidance within the annual report. And then for the Road division, yes, you are fully right that the automotive sector has been a little bit lower than what we had expected. And also compared to last year, we have seen some plants that have been shut down for a longer period due to their conditions. And also the Danish legislation has an effect on us. It's impossible for us to measure that, but I think it definitely has an impact on our current figure. And then we also downscaled some of our activities in Switzerland and Germany. I can't tell you the right figure, but my best guess would be that has an effect on the operating income in the range of something around 1.5%. Maybe it could be a little higher, but 1.5% would be my best guess. And that's also included on the quarters. And then on the gross margin, yes, we have updated our guidance because we have a believe that our margin would be more under pressure. Please bear in mind that LGT has a higher gross margin than the older LGT. So that has impacted our gross margin, and we will definitely also see the full quarter impact from LGT that will bring the margins up a little bit, I think something in the range of 1.5% would be a good estimate that LGT will affect our gross margin at the moment. But it will be up for discussions. And that means that you might even see that our markets will go up a little bit in Q4. But we have built a very strong sellout to the customers and telling them that they will also take part in the increased prices. And then we have also been very good at operating on the spot market. It's a very hot market. So we definitely do not believe that we will see an increase in the gross margin in Q4. And then we will come up with the guidance for the next year, but what would be -- we only -- it was valuable and very positive.
Great. I don't know if I can continue to ask more questions or if I should jump back in the queue.
Yes, please jump back in the queue.
Next question comes from the line of [ Lars Peando ] from Nordea.
A couple of questions regarding the markets. You talked a little bit about some of the verticals, automotive. We know that that's disrupting a little bit because of the lack of components. But are there any other verticals that are doing good or bad? And then I'm interested maybe getting a few comments on the markets. You also here mentioned a little bit maybe struggle both in Switzerland and Germany. And I'm particularly interested about U.K. What do you see going on over there? Still problems with customs clearance, access, return of trucks and drivers, et cetera, et cetera? Any comments on that would be very helpful.
Thank you, Lars. I think all the markets in automotive are doing pretty well so -- of our verticals. So we do not measure a lot worst case. So our main focus is vertical of automotive, but it seems like the others are doing very well. And then you're quite right on the U.K. market, it's still crazy. It's very difficult to get [indiscernible] to drive in the U.K. market. There are still standing a little bit longer on the borders. It's, of course, better than it was in the beginning of the year, but it's still a difficult market to operate. We have changed our operation a little bit. So we are now sending trailers on a loan basis on the pairs instead of driving below the bridges. And that means that we have trucks on each sides over in the U.K. market. And that's why we have been able to cope with that. But the market is crazy, and it's really difficult to find capacity for the market, and that has also been driving the prices really on that market.
Okay. And on that path, where you have, I would say, relatively fixed agreement and lease to may be recurring customers. Are you back to back and reasons in terms of how you operate? And the reason why I asked this is because you've been talking quite a lot about the tight supply of -- both of trucks and also drivers. So are you in any way, I mean, are you leaning out in either direction in terms of how much you book from the customers and how much you cover from sub suppliers?
I think we are able to step out just increasing our clients in the mainly that we simply couldn't operate with these market conditions that would mean that we would lose a lot of money bringing a truck to the U.K. So we have been out equity new prices with the customers. So definitely, we have some kind of back to back -- not a real back to back but just out saying we can't avoid that. And we have that all in our agreements that we are able to commit back if the market situation is changing significantly. And it has really been in that we have been out and seen.
[Operator Instructions] Next question comes from the line of Michael Rasmussen from Danske Bank.
First of all, in Air & Ocean, could you maybe add some comments on which routes that are doing in particular well? And also, if you could comment a little bit on the recent yield developments, i.e., do you maybe expect the spot rates for both air cargo and ocean cargo to continue up until maybe Christmas or maybe into '22? And just on '22 and also coming back to kind of the business momentum and margins. What will happen to your operating margins, assuming a normalization on freight rates maybe after Chinese New Year or in the second half? So if you could just talk us through kind of the leverage in the business.
I think that it will be in the ocean market. I think that in particular for us, China, Germany has been very strong. But also Germany, U.S. has been a very strong market for us. So all our markets are actually very strong part. But if I mention only 2 then it would be these 2 markets where we also have a stronger position. And then on the spot price, as we are seeing as [ double spacing ] now. But yes, it's really difficult for us to have an opinion about that. We are seeing that it's stabilized now, but as you might recall, it is still like in the spring and then all of the sudden it went crazy again. So it's hard for us to guess. But we are seeing a stabilized market at the moment. And when we are seeing normalization after, I don't think it would -- maybe be a little later than Chinese New Year that at least what we expect at the moment. But then you will see that some of the margins will drop, but you will also see our gross margin will go up. So I think it has a big effect on us that we have to see. We can't come where -- we are not able to give a very qualified answer on that.
Great. Okay. And just a follow-up on your price increases in Road, kind of just broadly speaking. How do you time these price increases versus maybe some of your bigger competitors in the market, such as DSV, for example? Do you go out and announce a price increase shortly after they have done so, i.e., being a price follower? Or is this something which kind of happens constantly or more or less all the time given the situation of the market here?
On the Road, we are in a daily contact with our clients, and making sure that we have the capacity needed for the day and the weeks and the months to come. And it's a daily communication about what is needed and what is expected from our suppliers. So it's -- we cannot say that it's not in any way -- it's a day-to-day talk to the clients what capacity they need, and we need to try to secure that capacity.
Okay. Great. Yes. And what about the staffing situation. I think the last time we met, you talked about your sub-suppliers had to go even further south and east in order to get staff. Any indications of these issues becoming even tighter? Or is there some easier terms under way?
No. As we also mentioned in the report that it's still very difficult, and it's something that we are working on all the time. And I believe that when we look into next year, when we see the mobility package starting in the 1st of February, I do not believe that it will be easier at that time. So it's a challenge, but we offset and we keep on working together with our clients to make sure that we can cover the needs that they have also for the future. So yes, that's it.
Great. And just one last question and then I'll jump out again. If you could just comment on your minorities stakes and the status on ring the bell, please.
Yes. We have swapped some shares with, in particular, some of the polar companies, and they are a little -- and that's been done throughout Q3. And yes, we have seen some of the companies with minorities. They are the ones more challenged for the automotive vertical more than others. So that is the reason why the minorities is lower than what we have indicated in our own assumption.
There are no more questions at this time.
No more questions? So then I will say thank you very much for listening in and looking forward to see you next time again. Thank you.
For today. Thank you for participating. You may all disconnect.