NTG Nordic Transport Group AS

CSE:NTG

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. This is the conference operator. Welcome and thank you for joining the Nordic Transport Group Third Quarter 2024 Results Conference Call and Webcast. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Mathias Jensen-Vinstrup, Group CEO. Please go ahead, sir.

[Mathias Jensen-Vinstrup, executive]

Thank you. And welcome to our Q3 2024 conference call, and thank you for dialing in.

If we go to Page #2, we kindly ask you to read the forward-looking statement provided on the page. And if we move onto Page #3, you see the presenting team of today. My name is Mathias Jensen-Vinstrup, and I am the Group CEO of NTG, Nordic Transport Group. And I have Christian Jakobsen, our Group CFO, with me today.

If we go on to Page #4, you see the agenda for this conference call, which includes highlights for the third quarter of 2024, a review of the financial performance of the Group and the 2 divisions, a presentation of other key figures and then the updated outlook for 2024. By the end of the presentation, the line will be open to questions from the audience.

If we move on to Page #5, you'll see the highlights for the third quarter of the year. During this period, we announced 4 transactions. One was signed and closed during the quarter. Two were closed on October 1, and 1 is still subject to merger control approval. Each of these transactions support NTG's growth strategy, creating a stronger foundation for future expansion within key segments and markets.

Both the Road and Logistics and the Air & Ocean division delivered net revenue growth in Q3. For the Road and Logistics division, this growth was mainly driven by new business won during the first half of the year as well as the acquisition of RTC. However, the European road market continues to be characterized by a high degree of competition, while we await a macroeconomic pickup.

The Road and Logistics division is currently in a competitive market with pressure on freight cost. During the quarter, haulier costs continue to increase from lower levels at the beginning of the year. And to safeguard hauliers and capacity as well as to mitigate the higher freight cost, the industry began adjusting rates from the 1st of October, 2024. This is expected to have a positive impact on the gross margin in the coming quarters, likely more in 2025 than in Q4 of 2024.

The Road and Logistics results for the quarter were further challenged by the continuing difficult spot market in Sweden, partly offset by strong momentum in our entities in the Netherlands and in the U.K. The road market headwind will likely ease as European macro environments improve. However, this will probably take some time as the Road market is less volatile than, for example, the Air & Ocean markets. The focus continues to be on gaining market shares in existing businesses and integrating the recent acquisitions that we have made.

In the Air & Ocean division, revenue growth was primarily driven by higher rates along with the division's ability to increase activity in key markets. Market data suggests that both Air & Ocean -- the Air & Ocean markets grew at 5% to 6% in Q3 and NTG have grown more than that. Despite the positive developments, the division faced a continued pressure on yields driven by high competition.

The cost base in Air & Ocean was impacted by a DKK 6 million one-off related to restructuring, which means that our cost base excluding M&A should improve in the coming quarters. On a like-for-like basis, the cost base was slightly lower compared to the same period last year.

To end the Air & Ocean on a high note, we have seen significant improvements in our entities in the U.K. and in Germany in particular, which have been challenging markets for us in the past. The measures that we've taken together with the local teams are now starting to pay off and the first positive financial contributions from each country started to materialize in the third quarter of the year.

Based on the results delivered during the first 9 months of 2024, we have narrowed the full year guidance for the full year. EBIT is now expected to be in the range of DKK 500 million to DKK 550 million, representing a reduction at the top end of the range from previously DKK 580 million. Lowering the top end of the guidance is primarily due to lower than expected market growth, but Christian will get back to that later in the presentation.

If we flip to Page #6, you see an overview of the recent acquisitions that we did and as I mentioned earlier. In the top part of the page, you see the latest one being the acquisition of ITC Logistic GmbH, a German-based road and logistics specialist. ITC specializes in delivering bespoke road and logistics solutions to a portfolio of longstanding customers.

They are well-positioned as a full service end-to-end solutions provider, offering groupage, FTL, LTL logistics services and a suite of value-added services. Operating from 5 strategic locations in Western Germany, ITC employs around 130 white collar and 80 blue collar employees. They are expected to contribute approximately EUR 10.8 million to NTG's consolidated adjusted EBIT over the next 12 months on an IFRS basis.

The acquisition reinforces our position in Germany by expanding scale in the existing network following the acquisition of SCHMALZ+SCHON earlier in the year. The acquisition will unlock synergies for NTG estimated at EUR 2.3 million, primarily driven by operational and commercial optimization as well as cross-selling opportunities. And the integration costs are expected to amount to approximately EUR 1.8 million.

During the quarter, on the 10th of September, we closed the agreement to acquire 60% of the shares in Asia-based Freightzen Logistics, which is now part of NTG APAC holding together with NTG's existing subsidiaries in Japan, China and Hong Kong. The acquisition and the transfer of the subsidiaries will strengthen NTG's Air & Ocean position in the Asia-Pacific region.

It's not part of the Q3 results, but I still want to mention that on the 1st of October, 2024, we closed the acquisition of 100% of the shares in the German-based SCHMALZ+SCHON and the land-based furniture logistics activities of Schenker Italiana in Italy. We are happy to welcome all the new colleagues to NTG and we look forward to bringing them along on the journey going forward.

It goes without saying that M&A remains a strong strategic priority for NTG and we are continuing to search for and evaluate new and interesting opportunities in our efforts towards making value-creating acquisitions. Our focus remains on ensuring a seamless and smooth integration of the German acquisitions that we recently did.

So with those words, I will hand it over to Christian, who will take you through the financial results for the third quarter of the year.

[Christian Paul Jakobsen, executive]

Thank you, Mathias. And please flip to Page #7, where you see the main financial highlights for the Group. Net revenue for Q3 2024 totaled DKK 2.3 billion, leading to a net revenue growth of 17% compared to Q3 2023, of which organic growth totaled 6.2%, driven by higher freight rates in Air & Ocean, proactive market approach and the start-up in the U.S.

Acquisitions contributed with 2.8%, driven by the acquisition of RTC and the closing of the acquisition of Freightzen as per 1st of September.

Currency effects had a positive impact of 4.6%. Gross profit increased 2.7% to DKK 456 million, corresponding to a gross margin of 19.9% versus 22.6% in Q3 2023, affected by the squeezed yields from the hard market conditions. In the Road and Logistics division, it was driven by higher haulier costs, partly offset by the positive impact from the RTC acquisition. In the Air & Ocean division, it was driven by the pass-through effect from higher freight rates and pressure on the gross profit yields.

Adjusted EBIT decreased to DKK 114 million, equal to a decrease of 29.2% compared to Q3 2023. Adjusted EBIT and operating margin in 2023 were positively affected by the earn-out agreement release to AGL and the sale of the building in Germany, equaling around DKK 26 million.

If we move to Page 8, you find a summary of the key performance indicators. As illustrated to the left, the gross margin development from the Group has declined compared to previous quarters in Q3 '23 due to demanding and competitive market conditions, higher pass-through rates as well as increasing haulier costs and lower gross profit yields.

In the middle of the page, you see the conversion ratio was decreased compared to previous quarters in Q3 '23, negatively affected by the gross margin pressures in both divisions. And on the right-hand side, you see the development in the operating margin, which also decreased compared to previous quarters in Q3 '23, mainly due to the earn-out settlement, as I mentioned before, whereas underlying margin was affected negatively by the gross margin development.

And if we flip to Page 9, you find a summary of the financial performance for the Road and Logistics division. The division generated a net revenue of DKK 1.6 billion in the quarter, equal to an increase of 6.8% compared to Q3 '23, of which organic growth totaled 2.9%, driven by new business in main markets, while slightly offset by some lost volumes in Sweden.

Acquisition growth totaled 3.1% due to the acquisition of RTC. Currency effect had a positive effect of 0.8%. If we look at the gross profit, it decreased 1.2% to DKK 325 million in the quarter, corresponding to a gross margin of 20.9% compared to 22.5% in Q3 '23, primarily driven by increasing haulier costs and was partly offset by the effect of the RTC acquisition.

Adjusted EBIT decreased 19.3% to DKK 88 million in the quarter, corresponding to an operating margin of 5.6% compared to 7.5% in Q3 '23. The margin was negatively affected by the gross margin development as well as the decline of volumes in Sweden.

And if you flip to Page 10, you find a summary of the financial performance for the Air & Ocean division. The division generated a net revenue of DKK 738 million in the quarter, equal to an increase of 46.7% compared to Q3 '23, of which organic growth totaled 38.9%, driven by the higher freight rates, efforts toward new business and then the start-up cost in the U.S., whereas currency effect had a negative impact of 0.2%. And as I mentioned, Freightzen was closed on the 1st of September and was adding 2.2% to the growth.

Gross profit increased 13% to DKK 130 million, corresponding to a gross margin of 17.6% in the quarter compared to 22.9% in Q3 '23 and it was driven by the pass-through effects from the higher air freight rates as well as the impact from the lower gross profit yields.

Adjusted EBIT decreased 50% to DKK 26 million, corresponding to an operating margin of 3.5%, compared to 10.3% in the quarter of '23. The margin development was negatively impacted by the movement on the earn-out and the sale of the building in Germany of the DKK 26 million, as I mentioned before and negatively affected by the gross profit development and the final effects from the restructurings in Germany and Netherlands, as Mathias mentioned in the beginning.

And if we flip to Page #11, you find an overview of other key figures. On the left, you see the net working capital increased to DKK 32 million at the end of September, an increase of DKK 14 million compared to the end of Q2 and an increase of DKK 83 million compared to the same quarter last year. The main driver relates to temporary effects in the U.S. and the uptick of activity. Initiatives have been launched to secure the normalized levels going forward.

The adjusted free cash flow totaled DKK 61 million in the third quarter of the year compared to DKK 73 million in Q3 '23. And on the right-hand side, you see the net interest-bearing debt, excluding IFRS 16, which totaled DKK 198 million as per 30th of September, 2024.

And then if we flip to Page #12, you find the updated full year outlook for '24. We expect an adjusted EBIT in the range of DKK 500 million to DKK 550 million, previously DKK 500 million to DKK 580 million. The revision is primarily due to lower-than-expected market growth in the Northern European road market. Our end-year outlook was based on a flat market environment, but we have adjusted our expectations as the market has declined over the course of the year. The outlook for the remaining part of the year assumes an overall flat market environment, but with soft macroeconomics continued muted consumer confidence.

We continue to closely monitor the current trading development and adjust the cost base accordingly if needed. Currency exchange rates are assumed at current levels. And because the financial and geopolitical uncertainty remained at a high level, the assumptions underlying the outlook may change during the year.

And that was all what we have planned for today. So operator, please open the line for Q&A.

[Operator]

[Operator Instructions] The first question is from Ulrik Bak, SEB.

[Ulrik Bak, analyst]

Firstly, a question on the European road market. I just read this morning that the German Chamber of Commercial Industry forecast 0 growth for 2025. And they have said that the economy is not just dealing with a cyclical slowdown, but also a structural crisis. So my question here is that in the event of flat volume growth in the European or German road market in '25 and given the current challenging market dynamics, how should we think about your ability to grow revenue and earnings organically in '25 versus '24? That would be my first question.

[Christian Paul Jakobsen, executive]

You see that we have in the market that we just saw in the quarter, I think we have seen some intelligence that it was down in the Northern Europe around 2% that we have grown organically. So that would be, despite that it's a 0, then it's maybe better than -- it is obviously better than what we're sitting in today where we have grown. So we definitely believe we can still grow in a 0 macroeconomic situation. That's for sure. You have seen that over the years that has been a part of our DNA also to grow organically.

[Mathias Jensen-Vinstrup, executive]

And to add to what Christian is saying here, in particular, in terms of Germany, I think a lot of the initiatives that we have taken and will be taking in connection with the 2 acquisitions in Germany, a lot also relates to the opportunities of strengthening the network across the footprint, in particular, in the Nordics together with the German organization and also with the Western European organization. So we do see a lot of opportunities to strengthen the network and also grow in that way despite a flat market development.

[Ulrik Bak, analyst]

Okay. That's clear. Then in terms of your price increases or the industry's price increases in the European road market, can you just add some flavor on how successful you have been? I remember you mentioning at Q2 that you would be quite selective, both in terms of regions and customer types and so on. But just the phasing of it and perhaps a magnitude information would be great.

[Mathias Jensen-Vinstrup, executive]

Yes. I mean, I think we can say that there's been a fairly broad-based understanding of the need to increase the prices in the dialogues that we have had with the customers. And we do see the price increases coming through. There's obviously different types of customers. Some can be phased in shortly and some will be phased in over a longer period of time depending on the contract type and when potential contracts are up for renegotiations. But we are -- we are seeing a good momentum already in October, but we do expect the increases to be phased in over the course of the fourth quarter and then to see the full effects in 2025.

[Ulrik Bak, analyst]

Okay. That is clear. And then a final question, just a clarification, Mathias. You mentioned a one-off cost related to restructuring of DKK 6 million. Just to clarify, is that part of the DKK 9 million special items for the quarter? Or -- and if not, can you just elaborate on the nature of these expenses?

[Mathias Jensen-Vinstrup, executive]

Yes. No. So it's not part of the special items. I mean, we consider it an ongoing part of the business to work with the entities that we have and to do the necessary actions in order to turn developments around whenever an adverse trajectory is ongoing. So this is not part of the special items. It's within the operating result and it's related to the organizational initiatives that were implemented in particular in Germany.

[Ulrik Bak, analyst]

And related to which segment, was it Air & Ocean?

[Mathias Jensen-Vinstrup, executive]

Air & Ocean, Air & Ocean. The vast majority is -- the DKK 6 million is Air & Ocean purely.

[Operator]

The next question is from Lars Heindorff, Nordea.

[Lars Heindorff, analyst]

If I do one by one, if we can stay in Germany, Mathias, you, in connection with the half year report, you came across being, at least that was my impression, a little bit upbeat about the development in Germany. There's been a lot of restructuring and changes in terms of management and also reduction in FTEs.

Now you have DKK 6 million here in restructuring costs in the third quarter. So the question is actually very simple. Are you done now? And if you're done, when will we see the impact of these restructuring in Germany?

[Mathias Jensen-Vinstrup, executive]

Thank you, Lars. And just to be very specific here, the restructuring relates to Air & Ocean only and we are done with the restructuring in Germany and we started to see a positive contribution by the end of the third quarter.

[Lars Heindorff, analyst]

And when you say -- okay, but then I assume that it will have been negative in Q2 and in the early parts of the third quarter.

[Mathias Jensen-Vinstrup, executive]

That's correct.

[Lars Heindorff, analyst]

And if we look into Q4 and into next year?

[Mathias Jensen-Vinstrup, executive]

I think it will be a longer process than just a few months to turn the operations around, but we have seen a really good momentum and we are optimistic about the future. And I mean, the restructuring cost relates to an adaptation of the cost base and we have seen around 15% to 20% of the total number of staff, sort of a decline in the total number of staff, but we expect that to be over. Now it comes down to commercial initiatives to continue to grow the business. But we do have good expectations for Q4 and also coming into next year and we will expect to see -- we will see results improve. That's our expectation.

[Lars Heindorff, analyst]

Okay. And then when we look into the growth and into the markets, which obviously is very tough at the moment in Roads, the 2 points, I think it was 2.9% organic top line growth. How much of that, if you can -- I don't know if you're willing to it, but if you can share any thoughts between the split between volumes and prices?

[Christian Paul Jakobsen, executive]

It's primarily volumes. We have not seen prices go up. We have seen a little bit on the spot prices over the quarter coming up, but that was coming up from a very low level. So if you look at quarter-on-quarter, you have seen better spot rates in Q3 than you saw in Q2, but I still think we are below on the prices compared to Q3 last year.

[Lars Heindorff, analyst]

Okay. And then Mathias, when Ulrik asked earlier about the outlook for '24 in Germany, so I mean, obviously, maybe a bit tougher to get through with those price increases that both you and a lot of other have tried to implement and announce to the customers, would it be fair to assume that you can increase prices by, let's say, mid-single digits, low-single digits in total into next year?

[Mathias Jensen-Vinstrup, executive]

No, no, I don't think that would be fair to assume in Germany. I mean, the price increases that we are introducing are mainly related to the Nordics, in particular, Denmark for the time being. So that's sort of import and export out of the Nordic region where we are introducing the price increases. The German market environment and the German competitive landscape and the German economy, it differs quite significantly from what we're seeing in the Nordics. And it will be a different approach when we go south of the border.

[Lars Heindorff, analyst]

Okay. And then last but not least on SCHMALZ+SCHON. I mean, if I understand it correctly, there should be on a full year basis, roughly DKK 40 million EBIT contribution. You closed the deal on the 1st of October. What kind of earnings contribution should we expect for this year with the remaining?

[Christian Paul Jakobsen, executive]

That you have to remember, this is a very asset-heavy, as I mean, they have a lot of buildings and a lot of fixed costs and that will cost us some money in December. So you can't take a normal seasonality as you can where you actually have an uptick in our general with the Christmas business and all that we have normally.

So you will not see a strong Q4 from SCHMALZ+SCHON compared to the other companies. So seasonality will actually be lower in that and I mean, I don't know -- now we don't know them very well, but I would probably expect it will be close to the worst quarter for SCHMALZ+SCHON.

[Lars Heindorff, analyst]

Okay. But on a full year basis, if we just look aside the seasonality, which I buy into your answer there, then DKK 40 million, is that ballpark growth?

[Mathias Jensen-Vinstrup, executive]

I mean, in the company announcement, we communicated EUR 5.5 million in expected effect on our adjusted operating profit and we stand by that communication.

[Operator]

[Operator Instructions] The next question is a follow-up from Lars Heindorff, Nordea.

[Lars Heindorff, analyst]

Yes. Sorry, it's me again. One thing which I forgot was on the net working capital. The start-ups, which have an impact on the Air & Ocean business, can you just remind me where are those and the progress of those start-ups?

[Christian Paul Jakobsen, executive]

The progress is that they have gained ground. They have won customers and are really contributing to the organic growth. But as also we have said, this is U.S. and Germany mainly. And then they also have a little Asia to the U.S. But it's mainly U.S.-based and then it's -- #2 is Germany, which is the single biggest part of the start-up.

[Lars Heindorff, analyst]

And the net working capital that they consume because you have seen a bit more tied up in terms of net working capital, is that something that will be reversed in the coming quarters? Or how should we think about that?

[Christian Paul Jakobsen, executive]

We expect to improve the net working capital in the coming quarter.

[Operator]

The next question is a follow-up from Ulrik Bak, SEB.

[Ulrik Bak, analyst]

Just on the European Union mobility package, can you perhaps just outline the proposed changes to it? And how you expect this will affect the supply-demand dynamics for the European road market? Yes.

[Christian Paul Jakobsen, executive]

Ulrik, at the moment, the European Court has rejected that and -- but the commission is keeping on to this. So at the moment, we don't know what will happen. That's when they have a decision between them, then we will comment on it, but it's -- we don't know what will happen at the moment.

[Mathias Jensen-Vinstrup, executive]

But you can argue that the part of the mobility package that they are questioning is the return to home for the trucks every 8 weeks. And so if that decision is overruled for good, then it may impact the capacity situation in Germany as a whole, given that the trucks can stay on European soil, on Western European soil.

[Ulrik Bak, analyst]

Yes. And if you take it one step further, so that would mean that your capacity cost should all else decline. But how would it funnel through to your selling prices? Would you be able to earn a margin on this dynamic? Or would it be just a pass-through?

[Mathias Jensen-Vinstrup, executive]

I think it's difficult to predict the future and this is only on the supply side, right? So depending on how the demand side evolves also in the coming weeks and months, I think that you need to take that picture into account also. But again, everything else being equal, if more capacity comes to the market, it becomes less difficult to find the trucks for the loads.

[Christian Paul Jakobsen, executive]

But please remember, there are drivers leaving the market each day. So it's not going to be something which, in our opinion, will change a lot because, yes, there's really a need for drivers in the industry at the moment.

[Ulrik Bak, analyst]

Okay. But perhaps if we just rewind time to when it was phased in, I remember, Christian, you mentioning that it took out anywhere between 5% and 15% of the supply of the European market, which was at a time when demand was quite high. So that was clearly a positive for earnings in NTG and the industry as a whole was my impression. So just -- is that true and that this was actually a positive back then, just to get the facts straight?

[Christian Paul Jakobsen, executive]

I think we talked most about it was a pass-through effect towards the customer. I don't think that anybody was making any money of it. It was -- everybody was revising and coming to the customers and tell them that they had to pay some -- an additional price that wasn't funny because it was in this upbeat market. So -- and they have already accepted price increases before. So I'm not sure what it benefited us.

[Ulrik Bak, analyst]

Okay. That's clear. And then perhaps my final question here. Now you closed a couple of acquisitions. So obviously, you haven't had it on the books for too long. But so far, any surprises, negative or positive, from these acquisitions?

[Mathias Jensen-Vinstrup, executive]

No, I think it's very much in line with expectations. I mean we spent a fair amount of time doing due diligence and meeting most of the key people. And we -- everything is in line with expectations. I would say there's an awful lot of work to do, but we are on it and the team is on it and we have similar expectations as just a month ago or prior to signing the deal [ into ].

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.

[Mathias Jensen-Vinstrup, executive]

Perfect. Thank you. That was all for today. So thank you all for tuning in, and we will continue the dialogue with many of you in the next couple of weeks on the road. If you have any questions, please reach out to our Investor Relations Officer. We wish you all a great day. Goodbye.

[Operator]

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