NTG Nordic Transport Group AS
CSE:NTG
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
250
314.5
|
| Price Target |
|
We'll email you a reminder when the closing price reaches DKK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
NTG Nordic Transport Group AS
Earnings Call Analysis
Q3-2023 Analysis
NTG Nordic Transport Group AS
NTG Nordic Transport Group faced a challenging third quarter in 2023. Despite tough market conditions marked by macroeconomic headwinds and a prolonged destocking cycle, which put volumes under severe pressure, the company managed to maintain its full-year EBIT guidance at DKK 600-650 million. This resilience is a testament to NTG's ability to navigate through an environment where increased competition forces market participants to fight harder for shrinking volumes and decreased rates. In this context, the market has seen no signs of rate improvement due to significant spare capacity. The overall activity is slowing down, and the future economic landscape is mired in significant uncertainty.
NTG's financials reflect the ongoing turbulence. With a net revenue of DKK 2 billion for Q3, this represents a 30% decline compared to the same quarter last year. This drop in revenue is primarily due to a 29% negative organic growth as a result of the current market environment. Gross profit also took a hit, decreasing by 17% to DKK 444 million. Yet, the company's gross margin increased from 18.9% to 22.6%, demonstrating an ability to manage profitability margins amidst volume and revenue challenges. Adjusted EBIT followed suit with a 23% reduction, resulting in DKK 161 million for the quarter, though operating margin improved slightly from 7.4% to 8.2% year over year.
In response to market conditions, NTG has made strategic adjustments across its divisions. Cost reduction measures and capacity adjustments have been implemented to counter the pressure on conversion ratios from lower volumes, soft rates, and lower gross profit. In Q3, these measures, along with the partial reversal of the AGL earn-out and the sale of an office building in Germany, drove improvements in the operating margin. Such strategic decisions indicate NTG's commitment to maintaining operational efficiency even in a down market.
Drilling down into the divisions, the Road & Logistics and the Air & Ocean divisions painted a picture of contrast. The Road & Logistics division's net revenue dipped by 17% to DKK 1.5 billion, influenced by a 15% fall in organic growth due to reduced rates and volumes. The division's adjusted EBIT decreased by 20% to DKK 109 million, translating into a slight dip in operating margin. Similarly, the Air & Ocean division saw net revenue cut almost in half by 53% to DKK 503 million, primarily because of a 51% drop in organic growth, a significant decrease in freight rates, and macroeconomic challenges. This division's adjusted EBIT fell by 28% to DKK 52 million despite an increase in operating margin attributable to factors beyond regular operations.
Key financial indicators reveal that the net working capital worsened, increasing to a deficit of DKK 51 million, a DKK 22 million increase from the previous quarter. Adjusted free cash flow plummeted, totaling DKK 73 million in Q3 compared to DKK 223 million in the same period last year, mainly due to lower operating performance. Additionally, net interest-bearing debt, when set aside from IFRS 16 lease liabilities, stood at DKK 390 million at the end of the quarter.
NTG retains its full-year 2023 outlook, with adjusted EBIT projected to be between DKK 600 million and DKK 650 million. This forecast is premised on the assumption that business activity will hover around the levels seen in Q3. Included in the outlook for 2023 is the anticipated reversal of DKK 42 million related to AGL earn-out provisions, with DKK 21 million already reversed in Q3. Looking beyond 2023, NTG has set a midterm financial target to reach DKK 1 billion in adjusted EBIT by the end of 2027, betting on organic growth and M&A activities financed through cash flow and existing credit facilities. This mid-term goal presumes a stable environment devoid of any material adverse events that could drastically impact regional and global cargo volume and trade patterns.
You don't have any saved screeners yet
Good morning. This is the conference operator. Welcome, and thank you for joining the NTG Nordic Transport Group Third Quarter 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Michael Larsen, CEO. Please go ahead.
Thank you. Welcome to our Q3 2023 conference call, and thank you for dialing in. Let's move on to Page #2. Here, we kindly ask you to read the important notes provided in this slide. And then let's move on to Page#3. Here, you see the presenting team 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 CFO.
Let's move on to Page #4. Here, you see the agenda for this conference call, which includes highlights for the third quarter of 2023, a review of the financial performance of the group and the two divisions; a presentation of other key figures; and the outlook for 2023; and the reiteration of our midterm 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 for Q3 2023. In the third quarter of the year, the market conditions were challenging for both divisions. Macroeconomic factors continued to provide headwinds and the destocking cycle is taking longer than expected. As a consequence, volumes continue to be under pressure. With the lower volumes, competition in the market is increasing as market participants have to compete harder to achieve the same volumes as in the previous years.
The weak volumes and increased competition also put a downward pressure on the rates both in the Road & Logistics, but also in the Air & Ocean division. With significant spare capacity in the market, there's no signs of improvements of the rate yet. The macroeconomic landscape continues to provide challenging conditions with a slowdown in overall activity and significant uncertainty for the future development of the global economy.
Finally, the guidance provided on the third of August 2023 is maintained for the full year 2023, we expect to achieve an adjusted EBIT of DKK 600 million to DKK 650 million. With those words, I will now hand you over to Christian, who will take you through the Q3 financial results. Christian, please?
Thank you, Michael. On Page 6, you see the main financial highlights for the group. Net revenue for the third quarter of 2023 totaled DKK 2 billion, which is a decrease of 30% versus the same period last year. Organic growth contributed with negative 29% due to the challenging market environment for both divisions. Currency translation effects had a negative effect of 2.2%.
Gross profit decreased by 17% to DKK 444 million, corresponding to an increase in gross margin from 18.9% to 22.6% year-on-year. Adjusted EBIT decreased 23% to DKK 161 million in Q3, corresponding to an operating margin of 8.2% versus 7.4% in Q3 '22, reflecting relative receiving operating margin in Road & Logistics and a significant increase in the operating margin in Air & Ocean due to a partial reversal of the provision for earn-out related to the acquisition of AGL and sale of an office building in Germany.
To counter the pressure on the conversion ratio from the adverse market environment, both divisions have implemented additional cost reduction measures during the quarter and have continued to adapt to the current market conditions. 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 the same period last year, primarily due to lower rates, which allow higher gross margin.
In the middle of the slide, you see the conversion ratio, which increased compared to last quarter in the same period last year. The development was driven by the effects of the potential reversal of the AGL earn-out and the sale of the building. The conversion ratio continues to be under pressure from lower volumes, soft rates and consequent lower gross profit combined with continued investments in the [ sales ] organization.
As mentioned earlier, both divisions have reduced capacity and white collar [ breakdown ] in order to react to the market conditions. On the right-hand side, you see the development in operating margin, which increased both compared to the same period last year and compared to last quarter. Again, this was an effect of the reversal of the earn-out provision and the sale of the building in Germany.
And if we go to Slide 8, you see the financial review of the Road & Logistics division. The division generated a net revenue of DKK 1.5 billion in Q3 '23, which was 17% lower than the same period last year. The decrease was mainly related to organic growth, which fell by 15% year-on-year, driven by a combination of lower rates and lower volumes, especially in the summer months, July and August was lower than in the last couple of years with customer decrease in activity over the summer holidays to a larger extent than what was the case during the COVID pandemic and the subsequent period of supply chain disruptions.
Currency translation had a negative effect of 2%, especially with the devaluation of the Swedish krone having a significant negative impact. Gross profit decreased 7% to DKK 329 million, corresponding to a gross margin of 22.5% versus 20.3% in the last -- in Q3 last year. The conversion rate decreased 5.5 percentage points year-on-year, mainly due to the lower gross profit.
Adjusted EBIT decreased 20% to DKK 109 million in Q3, while the operating margin declined to 7.5% from 7.8% last year. As in previous quarters, the division continued to adjust capacity and the cost base during the quarter in response to the market conditions. And if we move to Page 9, you see the financial review of the Air & Ocean division, the division generated a net revenue of DKK 503 million in the quarter, which was 53% lower than the same period last year, composed of organic growth of negative 51%, mainly driven by the continuing destocking value and lower volume due to macroeconomic headwinds.
Gross profit decreased 35% to DKK 115 million, corresponding to a gross margin of 22.9% versus 16.7% in Q3 '22. This development was mainly due to the significant decrease in freight rates compared to last year. Adjusted EBIT declined 28% to DKK 52 million corresponding turnover operating margin of 10.3% versus 6.7% in Q3 '22. This margin increase was driven by departure reversal of the earn-out and the sale of the building.
Generally, the conversion rate remains under pressure as a result of the lower absolute gross profit. And then if you flip to Page 10, you see an overview of the key figures. On the left, you see the net working capital increased to minus DKK 51 million as of 30th of September 2023, an increase of DKK 22 million compared to the end of Q2. The adjusted free cash flow totaled DKK 73 million in the third quarter of the year compared to DKK 223 million in the same period last year, mainly driven by lower operating performance and increase in the net working capital in Q3.
Finally, on the right-hand side, you see the net interest bank debt, excluding IFRS 16, which totaled DKK 390 million by the end of the quarter.
Then if we move to Slide 11. You see the full year out outlook for 2023, which was provided on 3rd of August 2023. And for the full year of 2023, we maintain our expectations of an adjusted EBIT of DKK 600 million to DKK 650 million. The outlook assumes that activity will remain at current level for the remaining part of the year. The full year outlook includes the effect of an expected reversal of the provision for earn-up release related to the acquisition of AGL amounting to a total of DKK 42 million FY 2023, of which DKK 21 million was reversed in Q3 '23.
Finally, we maintain our midterm financial target that you see on Page 12, no later than by the end of 2027, we tried 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 raises is included, although we will evaluate the source of financing for larger acquisitions. Finally, the midterm guidance -- midterm target assumed no additional material adverse events affecting regional and global cargo volume and trade patterns and NTG continuing to develop the business, establish new startup and execute this in management center. 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 the line of Bak Ulrik from SEB.
Yes. I'll take them one by one. Firstly, can you perhaps elaborate a bit on the volume trajectory throughout Q3 and into Q4 so far. And in this context also comment on your guidance and the comment that you make that you do not expect a seasonal volume uptick in Q4? That would be my first question.
Yes, in our guidance before you saw this earn-out, then we expected that the market would see a pickup throughout the end of Q3 and into Q4. And now we don't see that uptick, and we don't see that the seasonal pattern where we see Q4 being the strongest quarter will assume this year. So we are seeing that it is very muted, and then we are still expecting that it will be muted throughout the rest of the year.
Okay. Then my second question is on the Air & Ocean division. You've previously mentioned that larger freight forwarders are increasingly focusing on smaller shippers, which are normally your target customers. And that this has put pressure on your Air & Ocean volumes. What is the latest development regarding this dynamic? Has it continued? Has it gotten worse? Is it becoming better? Any color you could provide.
I think we see the same pattern as we saw in Q2 that -- and maybe also in Q1 that the bigger freight forward has a higher focus on the SME at the moment. And therefore, we expect that we are experiencing that they are challenging us. And we, of course, finding hard to keep our customers. But it is a battle out there with the lower volumes of the Air & Ocean. So definitely, we're not only finding the big guys for some of our concerns. We still also have a hard part with the midsized freight forwarders.
Okay. And in this context, how should we think about this conversion ratio in Air & Ocean? In Q2, it seemed to have troughed at 20%. And in Q3, if you adjust for this provision and the sale of the office building, I calculated at slightly less than 23%, so a slight increase compared to Q2. Is it fair to assume that the conversion ratio has troughed now and will at least be at Q3 levels going forward?
We're not guiding on anything. But since the gross profit is under pressure, then of course, we hope that, that is as you described, but we don't know what will come. But we are definitely feeling that our gross profit is under pressure and -- but I cannot guarantee that it will not either increased pressure, but it has been a hard period now.
Okay. And similar question to Road & Logistics. The conversion ratio has generally trended down over the past year as you also show in your presentation. Yes, similar question. Is it your expectation that this will continue the negative trend? Or are you seeing also a trough here in the immediate future?
Well, the geographies that we are operating in, they are hard hit at the moment. And we are happy with that we are good. We feel that we are good at the conversion ratio, and we are trying to optimize that. But here again, the gross profit is under pressure. We are feeling that this pressure and we hope that when volumes are picking up, we also able to get a little bit more of gross profit. But we will adjust our cost base in accordance with the market.
And if the market is weaker than what we see now, then we need to adjust our cost base. And that's how it is. So we are doing everything we can to optimize our conversion ratio. But I can't guide you on what we are seeing in the coming period because we are expecting an uptick in the market and better market conditions, and we haven't seen them now and then we have to see when in next year -- if they are coming. But we will talk about when we are guiding for the next year.
Okay, makes sense. Then final question from me. Can you please remind us of the structure and the size of the AGL earn-out and whether there is a potential for further reversal of this provision?
Of course, there's a potential if they are underperforming what we have forecasted for Q4, then there's a potential for further, but we have not put that into our guidance. We've put in what we have said, and that's what it is. And then we'll have to see when we're doing the final calculations with the add-backs and what we have for this earn-out. And yes, as you know, we had around -- $28 million of the acquisition was part of the earn-out and we paid $70 million upfront and then we place [ 7.6% ] because we knew that the earn-out for '22 would be realized. So this is the year, this is the main part of the earn-out which is due for the protection and the hedging we did -- when we did the acquisition business for the performance of '23.
Okay. Just to be clear, so there's no earn-out component for '24 results?
No.
[Operator Instructions] The next question is from Heindorff Lars with Nordea.
A few for me as well. I'm curious about your comments on the development here as we head into the fourth quarter and you say that fourth quarter is normally the strongest one. Is that specifically -- it was under a group level? Or was this specifically meant in relation to Road or Air & Ocean?
I think for Road definitely. For Ocean, it is more -- there's not that much seasonality and peak off in the Q4. So it is for Road. Please remember, Road is our biggest division. So the main part of this comment is definitely for the whole group and because of Road is being the biggest division.
Okay. And then if you stay on Road & Logistics. The gross margin, we've been talking about this in some of the earlier calls, it's been moving up, I think, partly because of rates coming down, and some of that is caused by diesel surcharges, which to some extent is a pass-through. But it's still at fairly high levels. Now with the oil price declines, I mean, what should we expect in terms of growth as we head into the fourth quarter and also the decline of -- headline decline of around about 15% in the top line. How much of that is caused by volumes? And how much is price?
It is, as you can see with the diesel being down quarter-on-quarter, then the main part would be pricing, but definitely also we are seeing volumes are dropping. So it is a combination. And we're not measuring internally on that because what we have seen is that we are measuring on consignments, but we're also seeing that our consignments are being smaller. So I wouldn't be able to give you the precise figure of what would be the combination. But we are seeing both consignments being -- dropping a little bit, but also seeing them being smaller. And then we're seeing a big part of it as being priced and in particularly on the diesel floater, but also you also see that the spot prices, they are very small at the moment. And you need to really to -- you're not getting further repositioning, you're not getting paid any decent money where we've made a lot of money last year.
Okay. Sorry if I hear you, if I understand you correctly, then there will also be a negative impact from diesel floater as we head into the fourth quarter. Is that correct?
You will definitely. We are seeing that the diesel floater is actually picking a little bit up so far for October, and I don't know what will it be for November and I haven't seen that. So diesel floater will be higher in October, probably than what we saw for September. So I'm not able to give you any more flavor on that.
No, no. But the reason why I'm asking this question is basically because to get a sense for the gross margin. I mean, obviously, it affects -- it is affected by the development of the diesel floater and the prices in general, but also your ability to push that lower price in the market to share subsuppliers. So in short, maybe phrase it in a different way. Will your gross margin, will that be able to -- we'll be able to uphold that at these levels here, 22%, 23%?
I'm not able to give you any more flavor on that at the moment, to be honest. I don't even know what diesel would be for the next month as I mean it would be a little hard for me to give you any more flavor.
Okay. That's fair enough. And then on the cost side it looks as if your factory, I can see also the headcount going down a little bit that you started to take out some costs. Maybe if you can -- if you're willing to give us a bit of flavor on where you are in that process? And if actually you can do more, at least in the Road division, it looks like its cost is year-on-year it is flattish. And then if we adjust for the reversal in Air & Ocean, costs are actually quite a bit down both year-on-year and also but also quarter-on-quarter. So maybe a few words on that and the work there.
But we are -- have been adjusting a little bit on the number of employees in particularly in the Air and Ocean division. We have also taken measures in Road, and we will keep taking measures if volumes are not coming up, but it's also a little bit depending on what we win. But we have also said we are not doing the big cut down because we are expecting the market to keep up, and therefore, we should be ready to receive it again. But we are adjusting accordingly. But we are not cutting to the bone at the [indiscernible] if we're not seeing -- don't expect any signs of a market picking up, then we have to do a harder cut. But we are just cutting where we believe it is right. And then we are believing that we see a market that is coming back and we should be ready to pick it up.
Okay. But the cost base of the 168 -- sorry, DKK 167 million in total cost in the Road division in the third quarter, will that be a decent run rate to assume going forward? Or again, I'm a little bit unsure if I understand your answer. If you think that there's more to come or how you're going to go around these things.
Please remember that it was two vacations months early July and August. And when people are having their vacation, then you need -- we are releasing the holiday accruals. So they are lower than what you should expect for the coming quarters on that.
Okay. Very clear. Then on -- this is on mainly on Air & Ocean. We've been talking about these things before as well. And this is the -- again, the ability to do further cost cutting. I mean, maybe it's just me, but I'm curious to find out -- you have had some [indiscernible] in Germany. I know you've changed a lot of the employees down there. I mean how far are you in the process of getting Germany up and running? And also, can you do anything in terms of the sizes of your entities, which may prevent you in adjusting your cost base further, i.e., consolidating some offices or anything like that? I mean, are there any sort of possibilities which could make you more resilient in terms of the conversion ratio?
If I start with the Germany, but now we have got -- we changed [indiscernible] he started on the 1st of January, and he has set his team and you're perfectly right, we definitely had some disturbance in Germany, but the management team has set and the sales team is set. So we definitely believe that Germany from here will start this turnaround that we are we are expecting, and it's positive when we are measuring very closely from group side.
And you're right, if the volumes are not coming, then we need to look at the staff and also seeing whether does it make sense that we have all the small offices could be merged -- something. But at the moment, we don't see that we definitely believe that we have set in all of the organization, we are believing that we have the right setup and we should go out and win some volumes that is our plan, and that's what we are executing on.
The next question is from [ Jasna Stan ] with Carnegie.
Quite good. My name is -- I hope it's me, Dan Togo, Carnegie here. Just one question remaining here on your guidance. To reach the top end of the guidance, you will need to my calculation to have an EBITDA to the tune of DKK 170 million here in Q4 -- so that will be a sequential improvement and basically bringing it on par with Q4 last year. What measures can sort of say, will take EBIT to that level in Q4 if it's not the market fundamentals because I understand that they are quite depressed at the moment. Just to understand the dynamics here.
Well, you're right, and there's two things. We did expect to see the seasonality and if that comes as we expected before, then that could take us this. And then also, please remember that with the U.S., there is a CAGR. So if it is underperforming, then our EBIT is increasing, and it is a little strange. So therefore, we have it done as is. So -- we need really to -- yes, to have definitely not a lot of headwind in Europe and the opposite in the U.S. So Yes, it is a little strange situation with these earn-outs, but that's technically how it is.
So you -- just to understand, so that it will be negative from the earn-out of DKK 21 million in fourth quarter, but then there will also be a CAGR that will reverse part of that?
You came to the top. And let's say, this was not earning the money that we're expecting for Q4. Then actually, the earn-out would be lower and then we would have to reverse even more on. So it is a different situation to be at the moment. But as you know, it is a hedging of our results for 2023 that we are now paying less for the company than what we said because, yes, we had some concerns about the [ 23 ] and of course, we have seen that now due to the macroeconomic headwinds.
And then maybe we haven't discussed that or you haven't given some flavor on that. What is the M&A environment at the moment, has it become easier? Is it just as difficult as it was a quarter a year ago? Can you give some -- just some color on where you see things?
But we are -- we have a good pipeline, and we are seeing interesting companies out there, and then it's -- and we also seeing that the sellers have come somewhat down the [indiscernible], maybe they haven't come down enough. But we think that the market is close to seeing that deals can be done. So hopefully, it's only a question of time.
The next question is from Heindorff Lars of Nordea.
Just a follow-up. It's on AGL. I don't know if you can indicate what kind of run rate they make in terms of earnings at the moment, given the status and what you have been indicating about the markets and also in the U.S.
But yes, as we also put in, let's say, when we talked about Q2, we were expecting U.S. to pick up, and we haven't seen that. And you also see that on the rates to the euro, they are not increasing. We did see this short uptick, but apparently, it looks like it's down to being muted again. So we haven't seen that pick up in the U.S. that we expected.
[Operator Instructions] Mr. Jakobsen, there are no more questions registered at this time. Do you perhaps have any closing comments?
Yes. Thank you, and thank you for listening in. We look forward to see you out there and talk about the results and then thank you for listening.
Thank you. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.