Good day, and thank you for standing by. Welcome to the NTG conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star and one on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Michael Larsen. Please go ahead.
Thank you. Welcome to our conference call regarding the acquisition of Aries Global Logistics that was announced yesterday evening. We are very pleased and proud to announce this acquisition, which is a milestone transaction for NTG and a testimony to our ambitions of expanding the Air & Ocean division globally. With the acquisition of Aries Global Logistics, we significantly increase our global scale and footprint and accelerate the development of our activities in the U.S., that we, together with our hardworking partners in the U.S., built from scratch in less than four years. If we move to page two, disclaimer, I kindly ask you to read it, and then let's move on to page number three. There you see the presenting team of today. My name is Michael Larsen.
I'm the Group CEO of NTG, and together with me today, I have Christian Jakobsen, our Group CFO. Let's move on to page four. Yesterday, NTG signed an agreement to acquire 100% of the shares in the U.S.-based Aries Global Logistics or AGL. AGL is a U.S.-based international air and ocean freight forwarder and customs house broker that was founded back in 1985 by the current CEO, who is also a shareholder of the company. On this slide, you see a brief overview of the company. AGL is headquartered in New York with a total of nine offices in some of the largest U.S. logistics hubs. As you can see, many of these are located in the same places as our current U.S. entities.
In 2021, AGL reported a net revenue of $285 million and an adjusted EBIT of $15 million, which makes it our largest acquisition in the history of NTG. On the right-hand side, you can see AGL's service offering. In short, they are pure play Air & Ocean freight forwarder, offering end-to-end solutions to small and medium-sized customers, which include several value-added services such as customs house brokerage, insurance and documentation services, and third-party inland transportation and 3PL services. AGL and NTG are a great match for many reasons, in particular, due to its company culture, its decentralized setup, and its corporate values, which resembles those of NTG. The acquisition is an important testimony to our ambitions of expanding the Air & Ocean division globally, and AGL is clearly a huge step in that direction. We move on to page five.
Here we have highlighted the main strategic reasons for doing the acquisition. As I mentioned before, NTG and AGL are a perfect match in many ways. AGL offers a one-stop-shop concept based on an asset-light business model and a mindset of freight forwarding being a people's business, where empowerment of employees and decentralization are key to success. They also focus on the same core customer segment as NTG Air & Ocean division, namely the SME segment. With the acquisition of AGL, we double the scale of our Air & Ocean division globally, and we foresee many new opportunities from this, including significantly increased capabilities and scale and procurement, and an increased utilization of AGL's worldwide agent network and carrier relationships when joining forces with NTG subsidiaries in the NTG Air & Ocean division that are located across 15 different countries throughout the world.
With this acquisition, we also expand our footprint in the U.S. significantly, which is one of the key markets in this division. AGL's main focus on trade lanes between U.S. and China complement our existing footprint very well. As mentioned before, AGL offers a wide range of value-added services to their customers, and we look forward to offering these services to our existing and new customers, which enable even more competitive end-to-end solutions. AGL currently use CargoWise as their TMS system, and we will migrate our existing entity in the U.S. onto this platform as soon as possible following closing to standardize operating procedures, leverage best practice, and ultimately increase efficiency. With those words, I'll now hand you over to Christian. Christian, will you?
Thank you, Michael. As Michael mentioned, this is indeed a milestone transaction for NTG, and it will significantly strengthen our Air & Ocean division globally. On page six, you see that the Air & Ocean will increase in proportions to around 40% of revenue based on pro forma 2021 financials.
As you see on the right-hand side of the page, AGL will increase our revenue by nearly DKK 2 billion on annualized basis, and adjusted EBIT by DKK 100 million, which is based on local GAAP figures and excluding effects of IFRS 16, as well as estimated synergies. If you move to page seven, you see an overview of the main areas of synergies based on due diligence and preliminary analysis. We expect to achieve annual synergies in the range of $2.5 million-$3.5 million once AGL has been fully integrated. These synergies mainly relate to commercial and cross-selling opportunities between AGL and NTG by leveraging the complementary footprint and AGL's strong agent network and agent service offerings.
We also expect procurement benefits through increased scale from combination of AGL and NTG product volumes, which will double the scale of our A&O division. Lastly, we expect to gain productivity increases by consolidating the IT infrastructures in the U.S. and by implementing best practices and standard operating procedures. These synergies are expected to take full effect once we have completed the integration, which we expect to end in the first half of 2024. If we move to page eight, you see an overview of the transaction. NTG will acquire 100% of the shares in AGL at a valuation of $70 million on a cash and net-debt free basis, excluding the effects of IFRS 16.
In addition to the upfront consideration, the current shareholders of AGL may receive additional earn-out payments of up to approximately $6.7 million for 2022 and $28.3 million for 2023, depending on the performance in each year of AGL and NTG's subsidiaries in the U.S., and subject to certain adjustments. In order for the full earn-out to be achieved, a sustained level of performance of entities, existing entities as well as AGL is required. Due to the way we structured the transaction, we will obtain step-up in tax basis following closing of the transaction, which based on preliminary analysis, is expected to result in an estimated tax asset of approximately $8 million that can be utilized over 15 years.
Financing of the transaction will be based on existing cash and credit facilities, as our leverage ratio of 1.1 by the end of 2021, and existing covenants are more than sufficient to finance the transaction. Following closing of the transaction, our existing U.S. subsidiaries will merge into AGL, forming a single entity for our A&O activities in the U.S. going forward. The existing minority shareholders of NTG in the U.S. will become shareholders of the combined entity, and two existing shareholders of AGL, including the CEO, will also reinvest a part of their earn-out into this setup in both 2023 and 2024. We will provide further details regarding the impact of the transaction on our financial outlook for 2022 in connection with the closing. I will now hand the word over to Michael for an overview and the next steps, and the closing remarks.
Thank you, Christian. Before closing the transaction, we await certain approvals, which we expect to have no later than by the end of June, and will commence integration immediately thereafter, including the mergers of legal entities in the U.S., which we expect to be completed by the end of this year. Following completion of the mergers, existing minority shareholders of NTG's U.S. subsidiaries will become shareholders in the combined entity, while the current CEO of AGL will continue as CEO going forward, as Christian also mentioned just before. The current CEO and Executive Vice President of the company will also reinvest a part of their earn-out proceeds in accordance with the principles of NTG's partnership model alongside our existing partners. Two years from closing, we expect the integration to be finalized and the synergies to be fully harvested.
That was all we had planned for today. If there's any questions, we are ready to take them.
Thank you, dear participants. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad. The first question comes from the line of Michael Vitfell-Rasmussen from Danske Bank. Please ask your question.
Yes. Thank you very much. I have a number of questions, but I think it's better if I ask them one at a time. First of all, well done on achieving such a sizable acquisition and in the right division as well. It seems a very good fit from my chair. Can you talk a little bit about the historical performance of AGL, please? What has growth been historically and how has profitability developed in the past few years, please?
Shall I take that one, Michael?
Yes, please. Yeah. Can we take them, one by one?
They have seen an uptick, definitely also in 2021, which I think the most of the Nordic companies have seen. I think they are following pretty much the same trends as you've seen from other Nordic companies.
What kind of profitability levels were they seeing back in 2018, 2019 in terms of maybe operating margin?
I think we will not sit and debate that. We are very firm on the 2021 figures. As you know, if they will trade down, then we have a mechanism on the earn-out and so on. We believe firmly that is on a pretty sustainable level. It might go a little bit down, but it's also been a part of the business case that it will also be a very good investment even though that it will drop a little bit compared to the 2021, which of course was bigger than prior years.
Okay. Can you add some more details on the mechanism that will trigger the earn-outs in both 2022, but more interesting in 2023 years? Is it them reaching a certain EBIT margin or EBIT number or what's to happen here?
You know us, we like fixed amounts, not margins. So it's a fixed amount they have to reach, and pretty much yeah, not very far away from what we have seen in 2021.
Okay. Roughly the same EBIT level in 2023 as in 2021.
More or less.
Okay. That's interesting. Thank you. My next question is on the minorities here, and if you can just kind of talk us a little bit through how we should expect Frank and Joe to reinvest back into the local pad here. What kind of ownership share will they most likely end up with post the deal here?
No, they don't. There has not been a direct agreement what they have to do, so that they will be decided when we are in that situation. That's also why we have said what we have said is that we will not affect our minority to be very high after this. You will probably see them invest some of their earn-out and therefore the minority share will not be increasing for NTG as you know around the 10% that we have today. That will not affect the 10% in general.
Okay.
[crosstalk] So. And then, um, then- Sorry.
How do you expect to keep the other key employees? Because I guess this is really the key in doing acquisitions is basically keeping the key employees happy and keeping them on the new setup. Any mechanisms that you're doing here?
Yeah, there are some tools to keep them. Definitely we will use some of the same tools as we have in NTG and then there are also some tools in the transaction.
Like stay-on bonuses or what are we looking?
Yeah. Some of it comes to this.
Okay. I don't know if I missed it, but in terms of the verticals, the client types, maybe you could add a little bit here. Who are we looking at?
I think it's a source. It is small- and medium-sized clients with not any particular verticals in that range. Probably around,
Okay. There's no huge exposure to a certain sector.
At least not to my knowledge.
Okay. Thank you. Yes, I'll now leave the floor to someone else to ask questions.
Thank you.
Thank you. The next question comes from the line of Lars Heindorff from Nordea. Please ask your question.
Yes, thank you for taking my questions. The first one is on the IT platform. You mentioned that AGL is running on CargoWise. Pardon my ignorance, but I can't recall exactly what systems you were running on. Maybe just a few words on how this integration, how that will run, how fast it will be. Maybe any indication on when you will have onboarded all the clients, or maybe it's your U.S. Client that will be onboarded into AGL system CargoWise or the other way around? I don't know.
They will definitely be onboarded to the AGL CargoWise One system. It will probably take up to three to six months to onboard the U.S. setup, and then we will have to find out what we will do with our current setup. We know we only like one TMS system, and you will probably see us make a decision about that when doing the closing or something like that, then we will have the decision what will be the future platform. To make sure that we have a very fast swift integration in the U.S. we will merge onto the CargoWise One platform in the U.S.
Your U.S. subsidiaries today, what are they running on?
They're running on our Scope set up.
Three to six months to onboard your existing clients into AGL's CargoWise platform.
Mm-hmm.
On the synergies, if I understand you correctly, there are no cost synergies, or these very minor stuff. I assume there will be mostly procurement and some cross-selling maybe. Why is it that it's going to take up until mid-2024 to realize those synergies if it only would take three to six more months to sort of onboard and integrate systems?
You know, talking with the liners at the current time, that's not that easy to get the discount agreements that a company of our new size will normally qualify for. They are not listening that much to us at the moment because they have enough to do with moving other cargo. That will take a little bit longer than what you would normally expect. You have to understand, we're not putting in the road, we'll just put them on our agreements for the Air & Ocean now. We have to use our size to go out and negotiate that. That will definitely take a little bit longer.
We also have to get people used to working together within the organization and using the HD and not the former HCL partner or the former department used to be.
Okay. Just for practical reasons, I think you said it in the presentation. There are around 158 employees in AGL. How many employees do you have in your U.S. setup today?
I'm sorry, I couldn't hear you.
AGL have 185 employees. That's at least what it states here in the presentation. How many employees do you have in the U.S. today, in the U.S. entities?
That would be around 30, 25, 30.
How much? Sorry.
25, 30.
Okay. All right. Thank you. Thank you for taking the questions.
You're welcome.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star and one on your telephone keypad. Another question comes from the line of Michael Vitfell-Rasmussen from Danske Bank. Please ask your question.
Yes, thank you. Just a slightly different question, but also related to the Air & Ocean business that you're buying into here. Maybe can you just give us an update on how you see the demand picture right now in the U.S., and also what kind of impacts that you've seen from the lockdowns in China recently?
Without sharing too much, I think that the volumes are still good and the prices are high. I also see that the air prices are going up again, so yeah, I think the market is as it was a week ago when we spoke about it.
Can you talk about the split between the air and the ocean business in AGL?
I don't think we have given any figure, but it is definitely a more an ocean business than air business. So that is the bigger one in AGL.
How do you see that normally? Is it more profitable in ocean versus air, or there's no difference between the two segments?
I think if you have seen it has moved all over. You saw when we saw in 2020 we saw a big decrease in our air wing when we saw the lockdowns and we had problems lifting that. Afterwards, we saw the big move in good cargo earning good money on that. I think it's a little bit depending on what time period you're looking into. I don't have a real strong picture on that one.
That's fair enough. What's the appetite now for M&A? Will it still be possible in the next maybe six months that you announce some smaller deals or is this unrealistic?
Definitely, we are definitely still looking for companies. You'll probably not see a transformative acquisition like this one, but definitely the bolt-ons would be very interesting and in particular in the road division now. We are slowly digesting LGT and putting them onto our platform, but meanwhile, we could definitely also take some road business and maybe also a smaller air and ocean company onto it. I think we have a pretty clear plan, and now we'll need to execute on that. We can definitely also execute on other transactions.
That's great. Great to hear. Thank you very much. Yeah, once again, congratulations.
Thank you.
Thank you, dear participants. As a reminder, if you wish to ask a question, please press star and one. Dear speakers, there are no further questions at this time. Please continue.
Okay. Then I think we will just say thank you very much for listening in, and we will now keep trying to close the deal as fast as possible. Then we will talk with you again when either the deal is closed or we are reporting our Q1. Thank you very much.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.