Good morning. This is the conference operator. Welcome, and thank you for joining the Second Quarter 2024 Conference Call and Webcast. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Mathias Jensen-Vinstrup. Please go ahead, sir.
Thank you, and welcome everybody to our Q2 2024 conference call, and thank you for dialing in. If we go to page two in the presentation, we kindly ask you to read the important notice provided in the slide. If we move on to page three, you see the presenting team of today. My name is Mathias Jensen-Vinstrup, and I'm the Group CEO of NTG Nordic Transport Group, and I have, as always, Christian Jakobsen, our Group CFO, with me today. If we go on to page four, you see the agenda for this conference call, which includes the highlights for the second quarter of 2024, including updates on the three M&A transactions that we have signed within the last two and a half weeks. It also includes a financial review and a presentation of other key figures, and finally, a reiteration of the outlook for 2024.
By the end of the presentation, the line will be open to questions from the audience. So if we go to page number five, you see the highlights for the quarter. In the second quarter of the year, we did experience an increase in revenue in both divisions, driven by a combination of higher rates and increasing volumes. However, gross margins were adversely affected by competition, increasing cost, and pass-through effects. If we take a look at the Road & Logistics division, we experienced a rather significant change in the market dynamics in the second quarter of the year. So if we go back to 2023 and the first quarter of 2024, we aggressively pursued market share gains, we squeezed the hauliers on prices, and we reduced the fleet of trucks that we managed in order to leverage the favorable spot market for procuring capacity.
Whereas in the second quarter of 2024, we saw the beginning of the end to this previous market regime as a combination of capacity leaving the market, higher haulier prices, elevated spot prices, and rate agreements with the customers entered into during the previous periods had an adverse effect on the gross margin and on the organic gross profit development in the second quarter of the year. In the second half of this year, in the second half of 2024, we will be looking to increase prices to counterbalance this adverse margin impact, but we will do that on a differentiated basis, taking individual market characteristics and imbalances into account. We continue to monitor the markets closely to evaluate if and when the time is right to introduce such surcharges.
The reduced gross profit, again in the Road & Logistics division, in absolute and relative terms, as well as investments in sales and group functions, were the main drivers of the organic decline in adjusted EBIT for the division in the second half, sorry, in the second quarter of the year. In the Air & Ocean division, increasing freight rates, higher pass-through revenue, and continued pressure on yields drove the gross margin lower, but the early indications of activity improving in the first quarter of 2024 continued to materialize in the second quarter as the volume development had a positive impact on the gross profit for the division.
Part of the activity increase and the spike in rates that we have seen starting in May was likely driven by the early onset of the peak season with importers front-loading cargo, which is also supported by the latest data related to, for instance, the U.S. consumer spending. If this is the case, we should also expect that the peak season also tapers off earlier in the second half of the year than what we usually see. If you factor in the effects of the earnout settlement regarding the acquisition of AGL, the restructuring cost in Germany and Netherlands during the quarter, and the effects of the startup in the U.S., EBIT for the second quarter of the year in the Air & Ocean division was on par with the same period last year, confirming the stabilization in the division that we experienced in the second quarter.
If we flip to page six, you will see an overview of the three acquisitions that we signed within the last 2.5 weeks, as mentioned in the beginning. To the left, you see the latest one being the acquisition of Schmalz+Schön a German Road & Logistics specialist with a revenue of more than DKK 1 billion and an operating profit of almost DKK 80 million in 2023. An acquisition that we expect to contribute to NTG's results on a local GAAP basis of around DKK 40 million within the next 12 months. The acquisition of Schmalz+Schön more than doubles our footprint also on the financial side in the German market, and it significantly strengthens our Road & Logistics division outside of Scandinavia.
We see multiple strategic opportunities arising out of the acquisition, including but not limited to cross-selling the full portfolio of services within the NTG network to the loyal customer base of Schmalz+Schön. We also see opportunities to promote collaboration between the Schmalz+Schön entities and those of our entities that have business transcending German territory. And finally, through the application of knowledge and experience that will further develop the combined Road & L ogistics service offering in the German market. This platform will be the backbone of our German operations going forward, and we will use this as a stepping stone for further growth and expansion in Germany by means of both organic initiatives as well as M&A.
In the middle, you see the acquisition of the land-based furniture activities of DB Schenker in Italy, an acquisition that builds on our entry in the furniture vertical with the acquisition of LGT Logistics back in 2021, followed up by the acquisition of RTC in 2023. These activities that we have acquired or signed a deal to acquire are currently part of the same furniture network as LGT Logistics, and they are acting as the partner of LGT in the Italian market. The acquisition safeguards this network, and it opens up new opportunities to expand the furniture activities outside of Scandinavia. In 2023, the activities generated around DKK 90 million in revenue. Finally, to the right, you see the acquisition of Freightzen Logistics, a Thai-based Air & Ocean freight forwarder headed up by two Danes, and they also have offices in Malaysia and in Vietnam.
The management team of Freightzen will assume the responsibility for NTG's Air & Ocean operations in the APAC region going forward to promote the development of our network, to promote organic growth in the region, and by this consolidating the activities in Asia-Pacific under one unified umbrella organization. While, of course, we cannot guarantee anything in any way, we are doing everything we can to continue the momentum on the M&A side, and in general, the M&A market seems rather favorable at the moment. With those words, I will hand it over to Christian Jakobsen, who will take you through the financial results for the second quarter of 2024.
Thank you, Mathias. On page seven, you see the main financial highlights for the group. Net revenue for Q2 2024 totaled DKK 2.3 billion, equal to a net revenue growth increase of 8.7% compared to Q2 2023, of which organic growth totaled 6.2%, driven by a proactive market approach, higher freight rates, and the startup in the U.S. Acquisitions contributed with 2.2%, driven by the RTC acquisition, as Mathias mentioned before, and SCS effects had a positive impact of 0.3%. Gross profit decreased 1.5% to DKK 475 million, corresponding to a gross margin of 20.6% versus 22.7% in Q2 2023, affected by the squeezed yields from intense competition and higher pass-through effect. In the Road & Logistics division, it was driven by higher haulier cost, 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 gross profit yields. Adjusted EBIT increased to DKK 165 million, equal to an increase of 11.5% compared to Q2 2023. Adjusted EBIT was positively affected by DKK 35 million due to the final settlement of the earnout agreements with AGL. If we move to page 8, you see a summary of key performance indicators. As illustrated to the left, the gross margin development for the group has declined compared to previous quarter and Q2 2023, primarily due to the demanding and competitive market conditions, as well as the previously mentioned haulier cost and muted gross profit yields.
In the middle of the page, you see the conversion ratio, which increased compared to previous quarter and Q2 2023, negatively affected by the gross margin pressure in both divisions, but positively affected by the earlier mentioned earnout settlement. On the right-hand side, you see the development in the operating margin, which also increased compared to previous quarter and Q2 2023 due to the earnout settlement, whereas the underlying margin was affected negatively by the gross margin development. If we go to page 9, you find a summary of the financial performance for the Road & Logistics division. The division generated a net revenue of DKK 1.7 billion in the quarter, equal to an increase of 5.5% compared to Q2 2023, of which organic growth totaled 2.4%, driven by new business in main markets, while slightly offset by some lost volumes in Sweden.
Acquisition growth totaled 3% due to the RTC acquisition, and currency effects had a positive effect of 0.1%. Gross profit decreased minus 0.8% to DKK 357 million in the quarter, corresponding to a gross margin of 21.5% compared to 22.9% in Q2 2023, primarily driven by the prior mentioned haulier cost and partly offset by the acquisition of RTC. Adjusted EBIT decreased 12.9% to DKK 208 million in the quarter, corresponding to an operating margin of 6.5% compared to 7.9% in Q2. The reason for that was the negative gross profit development, and of course, the fixed cost was relatively stable. If you flip to page 10, you find a summary of the financial performance in the Air & Ocean division.
The division generated a net revenue of DKK 644 million in the quarter, equal to an increase of 17.9% compared to Q2 2023, of which organic growth totaled 17%, driven by efforts to renew business by higher freight rates and by the startup of SCS in the U.S., whereas currency effects had a positive effect of 0.9%. Gross profit decreased 3.3% to DKK 118 million, corresponding to a gross margin of 18.3% in the quarter compared to 22.3% in Q2 2023. As mentioned before, it was primarily driven by the pass-through, the higher pass-through effects from higher freight rates, as well as the impact from the muted gross profit yields. Adjusted EBIT increased 133.3% to DKK 56 million, corresponding to an operating margin of 8.7% compared to 4.4% in Q2 2023.
The margin development was positively affected by the earnout settlement and negatively affected by the gross profit development and the effect of the restructuring activities in Germany and the Netherlands. If we flip to page 11, you find an overview of other key figures. On the left, you see that the net working capital increased to DKK 18 million as of the end of June 2024, an increase of DKK 36 million compared to the end of Q1, and an increase of DKK 91 million compared to the same quarter last year. The main driver relates to the higher rates and activity in the sea and some temporary effects in the US. The adjusted free cash flow totaled DKK 56 million in the second quarter compared to DKK 28 million in Q2 2023.
On the right-hand side, you see that the net interest-bearing debt excluding IFRS 16, which totaled DKK 213 million as per end of June 2024. If we flip to page 12, you find our full-year outlook, which remains unchanged, where we expect an adjusted EBIT in the range of DKK 500 million-DKK 580 million. We continue closely to monitor the current trading development and adjust the cost base accordingly if needed. The outlook includes the effect of the acquisition of RTC and limited effects from the three, and the outlook doesn't include any effects from the three acquisitions, which have not been closed yet.
The outlook does not include potential impact from other acquisitions during the year, if any, and currency exchange rates are assumed at current levels, and because of the financial and geopolitical uncertainty remaining at a high level, the assumptions underlying the outlook may change during the year. That was all what we had planned for today, so Margaret, please open the line for Q&A.
Thank you. This is the conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Dan Togo of Carnegie.
Yes, hello, and thank you for taking my questions here. On the roadside, conversion ratio now down to around at least 30% two quarters in a row. Where would you like to see the conversion ratio going forward, and what are the, so to say, the remedies? What can you do to improve and come back to previous levels of the conversion ratio? Is it on the cost side? Is it primarily sales initiatives? What can we expect going forward? I know you expect some sort of a seasonal pickup here in the second half, and hopefully, that will also bring you somewhat of the way. And then maybe also on top of that, or relating to that, some comments on the restructuring going on in Holland and Germany that has taken some time now. What will the potential impact be from that?
Maybe share some. Can you share some financials on that part? How much of the revenue is down there? What will the potential EBIT impact be once, so to say, this restructuring is all settled? Thanks.
Thank you, Dan. I will start with the road, and then Mathias will take the Air & Ocean. You're right. The conversion ratio is under pressure in the road division, and it all comes from the market situation where we are at today. We have seen hauliers go into bankruptcy and then coming to us and telling us, "You need to pay more, else we will have to go into bankruptcy, or we will just not be able to service you anymore." And that's why we have been forced to accept some price increases towards the hauliers. We have been really good at keeping our conversion ratios and our gross margins in the declining market, but simply now we are in a situation where hauliers, they can't live from the prices that they had received in the prior quarters.
I think we are seeing that it's a general trend in the market, and we will expect that in general that everybody will come out. And as Mathias mentioned, we will also see a price increase throughout the autumn, and then, of course, the normal seasonality will also come in place where we normally also see that the market is coming up. So we expect to see an increase throughout, but it's maybe a little. It will definitely affect Q4. I'm not sure how much we will see that in Q3, but we will definitely see some improvements in the gross margins in Q4.
In terms of the ongoing restructuring initiatives or the restructuring initiatives in the second quarter of the year, we need to distinguish between the magnitude of them in Germany and the Netherlands. In the Netherlands, it is the intention that the restructuring has been completed for the time being and that this was sufficient to stabilize the operations, whereas in Germany, we are working very focused on improving the situation, and I think we have been seeing a satisfying momentum during the course of the second quarter. In Germany, we have appointed a new managing director on the 26th of June, and we have a solid plan in place that is being executed at the moment in terms of turning things around. We do not expect to see any impact on the revenue and on the GP side.
This is mainly from a productivity and cost perspective that we are focusing the initiatives. So hopefully, we do expect to see that materialize also on the bottom line during the course of the third and in particular the fourth quarter of the year.
Thank you.
The next question is from Lars Heindorff of Nordea.
Yes, morning. Thank you for taking my questions. A follow-up on Dan, on the restructuring. What is the actual restructuring cost that you have taken during the second quarter?
I think we have taken in DKK a couple of millions in the quarter.
Okay. And Mathias, it sounds like this, at least in Germany, that you're not done yet. So should we expect more of this in the third quarter or at least in the second half?
I think that there's definitely still work to be done in terms of getting that particular business area back on track. Whether or not that will materialize in further restructuring cost is too early to say.
Okay. And then still on the Air & Ocean part, which is, I mean, clearly the fact that you've been subscale has been hurting you on the way down here post-pandemic, but you also say that you're investing in new areas. So can you maybe give us a little bit of indication, I mean, the new office that you opened up and the initiatives you're taking, exactly how much have they contributed with and what are the magnitude of this? If I understand it correctly, you both have something in the U.S. Is it also in the U.K.? And I might be wrong.
No, you're correct. I mean, the offices that you refer to here are not open during the second quarter of the year. These are the latest additions to our Air & Ocean operations. In terms of the U.S., that is, we have the startup Supply Chain Solutions that have one office in Indianapolis and one in Hamburg in Germany. And then we, during the latter part of last year, opened up a new office in Detroit, also on the Air & Ocean side. So I think that's the new ones in terms of the U.S. entities. In the U.K., we did also open up in Leeds and Birmingham. And in terms of the specific, I think, honestly speaking, I think we are seeing in the U.K. that they are balancing each other out. They're still being built up, and one office is faster than the other.
On the U.S. side, we still need to see those new office openings turning into a profit. Perhaps Christian can add a few details.
Yeah, but we have seen that if you just take the, as Mathias mentioned, we opened in Q1. Now we have five double the turnover in Q2, so we definitely see a positive trend there, but they're still not in black figures. But we also didn't expect them to be that when we did the business plan. They have definitely gained customers, and they gained ground. And then now they are also, when you come in, you have to be competitive on your offering, and therefore also you see a little bit squeezed gross profit. But we knew all that when we started, but they definitely got some traction on the turnover for the quarter.
Okay. And when these five offices, I think you mentioned there, Mathias, when they're up and running, what sort of magnitude out of the Air & Ocean will that contribute with?
I think in the grand scheme of things, Lars, I think this is part of the daily course of business, I would say, and we're not expecting any significant impact on these office openings. And I think we are not seeing any significant drag of the openings either. Set aside, of course, the SCS startup that we report on separately also in the report, which is growing really fast on the top, but it is also, I would say, more costly than the average startup that we have made. But we have no tangible guidance in terms of the impact on the financial side, but it won't be so material that you will note it in the figures going forward.
Well, Lars, you can do the math yourself. You have the startup as entities, and then you can do the math to show how much turnover we have already generated.
Okay. All right. Thank you. And then a question regarding the SSH acquisition, which I think was very, very interesting. And I think it sticks out compared to what you have done before a little bit. You've been communicating that, at least historically, you want to buy four to six times EBITs. This one is a little bit more expensive given its size. And then I know, Mathias, that you mentioned that there may be some cross-selling, but in the statement that you sent out in c onnection, you're right that there are no synergies. So is this a strategic acquisition? And I mean, I clearly understand that it might fit in, but then on the other hand, it sticks out given its size, given the higher price compared to what you're paid historically, and the lack of synergies. That puzzles my mind a little bit, to be honest.
So, I mean, what is the reasoning behind this acquisition if there are no synergies and if you cannot combine it with what you already have?
I think it's a fair question, Lars, and I definitely believe that there are synergies and opportunities. However, difficult to quantify from our side. I think what we referred to during the call and also in the release are more sort of intangible opportunities, and we would rather be on the sort of under-promise over-deliver side of things. So on the valuation side, we agreed it is a higher multiple than the 4-6x. I think we have seen deviations from that range in the past also, also taking AGL into account. It is not that we are changing that range, but I would also expect that we will be more differentiated in how we go about larger vis-à-vis smaller acquisitions in the future, given that we do see some correlation between the multiples and the size and structure of the setups that we acquire.
In this case, it is a strategic investment in the German market where we really are boosting the platform, boosting our capabilities, and we expect to use that platform and build further on that platform going forward. And that's why we went outside of the range in order to accelerate the development and move once and for all onto the European continent.
But I think, Lars, we also communicated that we are normally saying bolt-on acquisitions is below six, and strategic acquisitions, we can't buy them at a six in particular when we can't harvest synergy in that amount. And of course, we are working hard, but we are also not quantifying any soft synergies in those cases. So we definitely believe there will come soft synergies in this strategic acquisition, but that will take time to harvest, and it's impossible for us to quantify. We would love to do that, but you can't do that.
Okay. But is it complementary? Is it new? Are there any trade overlap on some of the trade lanes that you have in Germany already now? What's the reason? Because if you—I mean, after all, they have a bit of warehousing. You write that yourself in the statement. And if you include the leasing commitment as well, then we get a multiple, which is 16-17 times, as far as I can calculate, times EBITs.
I think if you add the IFRS 16 debt to the enterprise value, I think you need to adjust the operating profit for that also. So I think that will take the multiple down for sure from 15x-16x. I think if you include IFRS 16, we are around 11x. But it is definitely complementary. I mean, Germany is the center of gravity, and we have a lot of continental European activities on both full and part load and groupage side of things. Schmalz+Schön offers it all. So they offer full loads, they offer part loads, they offer groupage, they offer logistic services. And Germany is a market that will generate cross synergies for the rest of the countries, both in the north, in the west, and in the east going forward. That is our expectation.
How much is warehousing out of what they do?
That's a good question. In terms of revenue, Christian?
Yeah. I'll just come back on that, Lars.
Okay.
Maybe I'll just give you a call and give you the number.
Yeah. No worries. And then the last one, then I'll stop and get back in the queue. So net working capital. Christian, you mentioned that as well. Is there anything particular here? And is this sort of, can we expect a release in net working capital into the second half?
Yeah, we definitely expect a release. I mean, we talked about the Danish net working capital of DKK 80 million last quarter, and we got all that back. In the U.S., they got a new system. They got a huge pickup in consignments, and therefore they have been a little bit behind working with the new system and the many consignments. And then you have the normal pickup as we have as well. So if the rates come down, then we would also see that the net working capital is coming down. But as we also said, the supply chain services, they are binding more net working capital than what you have seen in the other business areas of NTG. So we'll probably have difficulties coming back to the prior level, but we will see it come down in the second half.
All right. Thank you, guys. Thank you.
The next question is from Ulrik Bak, of SEB.
Yes. Hi, Mathias and Christian. Also a couple of questions from my side. The first one on your guidance. As far as I understand, this positive impact of the DKK 35 million was not included in your Q1 guidance, which means that by maintaining your guidance, your underlying earnings guidance is actually downgraded. Can you just elaborate on what areas of your business have underperformed year to date? Or is it something that happened during Q2, also a drag from Q1? And also if you've changed your expectations for the second half of the year? That would be my first question. Thank you.
Thank you, Ulrik. Just to make sure, we have also told everybody when we did the guidance that there was so much uncertainty that we were guiding in the full range of the guidance. And of course, we are not on the way to—we're not on the way to the top of the guidance if you looked at the second quarter. And as we have said, growth is under pressure. They have not earned the same as we have expected. We experienced the challenges in the Air & Ocean division. We are seeing that coming up compared to Q1. So it is mainly growth that is under pressure, and it's particularly in the Nordics with the squeeze on the gross margin yields.
Okay. So for the second half of the year, it's not like you've adjusted your original assumptions for that, or given what you've seen year to date?
But of course, if you're not in Q2 hitting where you thought you would be, then it would also be very optimistic if you thought that the remaining two quarters would be on the same level. But as I said before, we expect to see some price increases and the squeeze on the gross margin lighten a little bit within the coming months. So yeah, we are a little bit - we haven't, as you also see on the bridge crossings on the Maut statistics in Germany, the market is down. We have gained market shares in a very competitive market. So it is a hard market at the moment, and we expect to see the gross margin coming a little bit up a little later in the year.
Understood. A question on these price increases that you expect to phase in during the second half of the year. When we look at market statistics, the German Maut or Øresundsbron, the market seems to be roughly flat, perhaps a bit in decline. What makes you confident that those price increases will stick and customers will accept them?
That's a fair question. As mentioned during the presentation, it will definitely be differentiated price increases, and it won't be any one-size-fits-all price increases, not by market and not by customer. It's an individual evaluation. Given the development that we are seeing and the pressure that we are seeing from the spot market in terms of procuring capacity and also from the haulier 's perspective, we do believe that some of the contracts ended in to and that the underlying assumptions for those contracts have changed sufficiently in order for prices to be adjusted. It is a discussion that we need to have with the clients, and we need to be profitable in terms of the businesses that we do. I think that that goes for all market participants.
Understood. Then a question on the Air & Ocean. You did quite nice organic growth, 17% in the quarter. If you can provide a split of price and volume, it would be much appreciated, but also perhaps some flavor whether what we should think about in Q3 and Q4. You talked about squeezed yields, and also we see on the gross margin also quite diluted. But should we expect some sort of restoration of the yields levels and the margins, particularly also thinking about what's happening in the Red Sea and what's been going on with the container rates? Should there be some uptake here in Q3 and perhaps also in Q4 if the situation is not resolved?
That's also a good question. In terms of the split between volumes and prices, I think, I mean, this will not be the first time that we provide that particular split, but it is definitely a combination, and we have seen solid progress on the volume side also. In terms of expectations for the remainder of the year, I think, as I also mentioned, that part of the activity increase is likely to be caused by the early onset of the peak season, meaning that there will expectedly be some slowdown during the second half of the year as the peak season tapers off also earlier than previously anticipated. But for the time being, I think we are seeing a stabilization also in the yields, and we are seeing increasing file sizes also, especially on the air side, which is supportive on the gross profit side.
So we are overall satisfied with the development in the Air & Ocean division and are carefully optimistic about the second half of the year.
That's very clear. Thank you so much.
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Okay. Perfect. Well, thank you, everybody, for participating on this conference call. Thank you for all the questions, and have a nice day.