Good day, and thank you for standing by. Welcome to the Nordic Transport Group Q3 2021 analyst conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, and I would now like to hand the conference over to your speaker today, Group CEO Michael Larsen. Please go ahead.
Thank you. Welcome to our Q3 2021 conference call, and thank you for listening in. If we move on to page two, we kindly ask you to read the important notice provided in this slide. Let's move on to page number three. Here you see the presenting team of today. My name is Michael Larsen. I'm the Group CEO of NTG, Nordic Transport Group. With me today, I have Christian Jakobsen, our Group CFO. Let's move on to page number four. Here you see the agenda for this conference call, which includes the highlights for the third quarter, review of the financial performance and other key figures, and the latest full year outlook for 2021. By the end of the presentation, the line will be open to questions from the audience. Let's move on to page number five.
These are the main highlights for the third quarter of 2021. The logistical challenges that have affected global supply chains in the first half of 2021 continued into the third quarter of the year. While the ocean freight capacity continued to be tight, increasing shortages of truck drivers reinforced the market imbalances in the road and logistics. Thanks to the valuable efforts of our employees navigating in the increasingly complex and challenging markets, we managed to maintain momentum from the previous quarters. We realized double-digit growth in both revenue and adjusted EBIT in Q3 2021. Although gross margins in both divisions were affected by the current market situation, the operating margins improved in Q3 2021 compared to the same period last year.
Thanks to increased efficiency, scalability, and the effects of activities discontinued in 2020, which all together drove up the conversion ratio in both divisions. During the third quarter, we also announced the acquisition of LGT Group, which we closed on 1st September this year. We expect annual synergies of approximately DKK 10 million from the acquisition, with full year effect from 2023. Finally, the strong financial results also led to an upgrade of our full year outlook on 11th November 2021. The guidance now reflects revenue between DKK 7 billion and DKK 7.3 billion and adjusted EBIT between DKK 520 million and DKK 550 million for the full year of 2021. With these words, I'll now hand you over to Christian, who will take you through the financial results for the Q3. Christian?
Thank you, Michael, and also welcome from my side. It's a pleasure to present such nice numbers. On page six, you see the main financial highlights for the group, where net revenue in Q3 totaled DKK 1.9 billion, up 37.2% versus the same period last year. The positive development in organic growth continued in Q3 with an increase of 24.8% compared to Q3 2020, mainly driven by higher rates in both divisions, but also increasing volumes compared to the same period last year. The effects from acquisitions within Road & Logistics contributed with 12.2% for the quarter, and gross profit increased 25.5% to DKK 399 million, corresponding to a gross margin of 21.3% versus 23.3% in the same period last year.
The gross margin development was primarily driven by the Air & Ocean division, where increasing passthrough revenue caused by elevated freight rates reduced gross margins in the third quarter. Adjusted EBIT increased 83.8% to DKK 143 million in Q3 2021, corresponding to an operating margin of 7.6% versus 5.7% in Q3 2020. The development was driven by increased efficiency and scalability as well as the effect from acquisitions and activities discontinued in 2020, which altogether led to a conversion ratio increase of 11.4 percentage points in Q3 2021. If we move to page seven, you see the summary of the key financial performance indicators, which illustrate that the gross margin development for the group was primarily driven by the development within the Air & Ocean division in Q3 2021.
However, increased efficiency, scalability, and effect from activities discontinued in 2020 more than offset the gross margin development in Air & Ocean division and supported the positive trend from previous quarters in the division's operating margin. When you look at the operating margin and conversion ratio for the Road & Logistics division and for the group in the second quarter of 2021, please keep in mind that these numbers were positively affected by the one-off effect from the contract termination of the logistics facility in Switzerland.
Adjusted for that, the conversion ratio and operating margin increased both for the division and for the group in Q3 2021 versus Q2 2021. If we go to page eight, you see the financial review for the Road & Logistics division. The division generated a net revenue of DKK 1.4 billion in Q3 2021, which was 26, 23.6% above same period last year. The increase was primarily driven by the effects of our latest six acquisitions that contributed with 14.8% and organic growth for the quarter of 8.7%, which was driven by the effects of surcharges introduced to safeguard existing capacities and customer relationships but also increasing volumes and spot prices.
Gross profit increased by 21.4% to DKK 312 million corresponding to a gross margin of 22.4% versus 22.8% in the same period last year. The gross margin development was primarily driven by increasing cost of procuring capacity, although the acquisition of LGT Group and capacity surcharges had a partially offsetting effect.
Adjusted EBIT increased 44.8% to DKK 107 million in Q3 2021, corresponding to an operating margin of 7.7% versus 6.5% in Q3 2020. The development was driven by increased efficiency, scalability, effects of activities discontinued in 2020, and the effects of acquisitions completed during the last 12 months. Altogether, these effects resulted in a conversion ratio increase of 5.342% in Q3 2021, which more than offset the gross margin development. If we flip to page nine, you see the financial review for the Air & Ocean division. The Air & Ocean division generated a net revenue of DKK 477 million in Q3 2021, which was 101.9% above the same period last year.
The organic growth of 101.4% was mainly driven by significantly higher rates and to some extent, volume increases. Gross profit increased 41.7% to DKK 87 million, corresponding to a gross margin of 18.2% versus 25.9% in the same period last year. As I mentioned before, the development was a result of elevated freight rates that resulted in an increase in pass-through revenue, which drove gross margins lower in the third quarter.
Adjusted EBIT increased 875.7% to DKK 36 million, corresponding to an operating margin of 7.6% versus 1.6% in Q3 2020, primarily driven by increased efficiency, scalability, and the restructuring activities financed in 2020 that contributed to a conversion ratio improvement of 35.6 percentage points, which led to the operating margin increase of 6 percentage points. If we flip to page 10, you see an overview of the other key figures. On the left, you see the net working capital increased slightly to DKK -139 million as per 30th of September , mainly driven by the growth in the Air & Ocean division, but also the effects of the acquisitions. The adjusted free cash flow totaled DKK 76 million in the third quarter, as illustrated in the middle.
Compared to the same period last year, the development was a result of improved operating performance in Q3 2021. Finally, to the right, you see the net interest-bearing debt excluding IFRS 16. That increased to DKK 41 million by the end of the quarter as a result of the closing of the acquisition of LGT Group. Finally, we on page 11 you see the full-year outlook for 2021, which we announced on 11th of November. For the full year of 2021, we now expect a net revenue in the range of DKK 7.0 billion-DKK 7.3 billion and an adjusted EBIT in the range of DKK 520 million-DKK 550 million.
The guidance includes the total net of one-off effect of DKK 20 million from the lease agreement termination in Switzerland in Q2 2021 and the expected effects of acquisition already closed. On the right-hand side, you see the assumptions underlying our guidance relating to the current market conditions in both divisions. I will give the word back to Michael for closing remarks.
Thank you, Christian. As mentioned in the beginning, global supply chains continued to be affected and challenged by market imbalances in both our divisions in the third quarter of the year. Thanks to our hardworking employees and our agile business setup, we managed to maintain momentum and continue our growth journey into Q3, which of course we are very proud of. This was all we had planned for today. Moderator, if you could please open the line for Q&A. Thank you.
Thank you. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments.
The first question comes from the line of Michael Rasmussen from Danske Bank. Please go ahead.
Yes. Thank you very much, operator, and, guys. Well done on some great results, once again. I would like to start off with three questions, please. First, Christian, can you please comment a little bit on your margin assumptions? You guide for mid-term margin assumptions of 4%-5%, and you are well ahead of that this year. Is this an indication of you expect margins to go down rather dramatically in 2022 and 2023 since you maintain these mid-term targets? That's my first question.
My second question is on organic growth in the roads business, which was a tad slower than both I had expected, but also slower than DSV reported in their organic growth for the third quarter, which was actually a surprise to me. I guess that automotive has been a drag, but are you also seeing some impacts from the Danish legislation, i.e., that you don't have the return volumes that you used to have? My final question is just on the gross margin in the roads business. That seems to have been kind of stabilized right now. Is this an ongoing level we should expect going forward, or do you see any up or downside risks to the gross margin in road, please?
Thank you, Michael, and you're right. Our mid-term guidance is up for review. We have said a little bit earlier that we want to beat our targets before setting new targets. Last year, I think we came out at 4.9%, and that means that we didn't beat it last year. Hopefully we strongly believe that we will beat them this year, and then we will, of course, review them. You should expect us to review our mid-term guidance within at the annual report.
For the road division, yeah, you have the— You're fully right that the automotive sector has been a little bit lower than what we had expected, and also compared to last year, we have seen some plants which have been shut down for longer periods due to their conditions. Also the Danish legislation has an effect also. It's impossible for us to measure that, but I think it definitely has an impact, but I can't give you a figure. Then we also downscaled some of our activities in Switzerland and in Germany.
I can't tell you the right figure, but my best guess would be that that had an effect on the organic growth in the range of something around 1.5%. It could be a little higher, but 1.5% would be my best guess. That's also included in on the quarters. Then on the gross margin, yeah, as we had updated our guidance because we had a belief that our margin would be more under pressure. Please bear in mind that LGT has a higher gross margin than the old NTG.
That has impacted our gross margin, and we will definitely also see the full quarter impact from LGT that will bring the margins up a little bit. I think something in the range of 1.5% would be a good estimate that LGT will affect our gross margin at the moment. It will be up for discussions, and that means that you might even see that our margins will go up a little bit in Q4. We have been very strong, been out to the customers and telling them that they will also take part in the increased prices. Then we have also been very good at operating on the spot market. It's a very hot market.
We definitely do not believe that we will see a decrease in the gross margin in Q4, and then we will come up with the guidance for the next year. We only, it works very well, and we're very positive.
Great. Thank you so much for that answer. I don't know if I can continue to ask more questions or if I should jump back in the queue?
Yeah, please jump back in the queue.
Okay.
Thank you. Next question comes from the line of Lars Heindorff from Nordea. Please go ahead.
Yes, morning. Thank you for taking my questions. A couple of questions regarding the markets. You talked a little bit about some of the verticals, automotive. We know that that's struggling a little bit because of the lack of components, but are there any other verticals that are doing good or bad? I'm interested maybe getting a few comments on the markets. You also here mentioned a little bit maybe a struggle in both in Switzerland and Germany. I'm particularly interested about U.K. What do you see going on over there? Still problems with customs clearance, access, return of trucks and drivers, et cetera. Any comments on that would be very helpful. Thank you.
Thank you, Lars. I think all the markets and our automotive are doing pretty well, so of our verticals, so we do not measure a lot in verticals. Our main focus is the vertical of automotive, but it seems like the others are doing very well. You are quite right on the U.K. market. It's still crazy. It's very difficult to get hauliers to drive on the U.K. market. They are still standing a little bit longer on the borders. It's of course better than it was in the beginning of the year, but it's still a difficult market to operate.
We have changed our operation a little bit, so we are now sending trailers on a loan basis on the ferries instead of driving below the bridges, and that means that we have trucks on each side operating in the U.K. market. That's why we have been able to cope with that. The market is crazy, and it's really difficult to find capacity for the market, and that has also been driving the prices really up on that market.
Okay. On that path where you have, I would say, relatively fixed agreement, or at least I will call maybe recurring customers, are you back to back and reasons in terms of how you operate? The reason why I ask this is because you've been talking quite a lot about the tight supply of both trucks and also drivers. Are you in any way, I mean, are you leaning out-
Yeah. Next question comes from the line of Michael Rasmussen from Danske Bank. Please go ahead.
Thank you very much. First of all, in Air & Ocean, could you maybe add some comments on which routes that are doing particularly well? Also, if you could comment a little bit on the recent yield developments? I.e., do you maybe expect the spot rates for both air cargo and ocean cargo to continue up until maybe Christmas or maybe into 2022? Just on 2022 and also coming back to kind of the business momentum and margins, you know, what will happen to your operating margins assuming a normalization on freight rates maybe after Chinese New Year or the second half? If you could just talk us through kind of the leverage in the business. Thank you.
I think that looking at the Air & Ocean market, I think that in particular for us, China-Germany has been very strong, but also Germany-U.S. has been a very strong market for us. All our markets are actually very strong, but if I had to mention two, then it would be these two markets where we also have a stronger position. Then on the spot price, we are seeing a stabilization now, but it's really difficult for us to have an opinion about that. We are seeing that it's stabilized now, but as you might recall, then it stabilized in the spring, and then all of a sudden it went crazy again.
It's hard for us to guess, but if we are seeing a stabilized market at the moment. When we are seeing normalization, maybe it'd be a little later than Chinese New Year. That is at least what we expect at the moment. Then you will see that some of the margins will drop, but you will also see our gross margin will go up. If it has a big effect on us, that we have to see. We can't come with a very qualified answer on that. We are not able to give a very qualified answer on that.
Great. Okay. Just to follow up on your price increases in road, kind of just broadly speaking, you know, how do you time these price increases versus maybe some of your big, bigger competitors in the market, such as at DSV, for example? You know, do you go out and announce a price increase shortly after they have done so, i.e., being a price follower? Or is this something which kind of happens constantly or more or less all the time, given the situation of the market here?
On the road, we are in a daily contact with our clients, making sure that we have the capacity needed for the day and the weeks and the month to come. It's a daily communication about what is needed and what is expected from our suppliers. We cannot say that it's not in any way a day-to-day talk with the clients what capacity they need, and we need to price to secure that capacity.
Okay. Great. Thank you, Michael. What about the staffing situation? I think the last time we met, you talked about your sub-suppliers had to go even further south and east in order to get staff. Any indications of you know these issues becoming even tighter? Or is there some easier terms on the way.
No, no, as we also mentioned in the report that it's still very difficult. It's something that we are working on all the time. I believe that when we look into next year, when we see the Mobility Package starting in the first of February, I do not believe that it will be easy at that time. It's a challenge, but we're up to it, and we keep on working together with our clients to make sure that we can cover the needs that they have also for the future. Yeah, that's it.
Great. Thank you. Just one last question, and then I'll jump out again. If you could just comment on your minority stakes and the status on Ring-the-Bell, please.
We have swapped some shares with, in particular, some of the Polar companies, and they are a little less than done throughout Q3. You have seen some of the companies with minorities. They are the ones who are challenged with the automotive vertical more than others. That is the reason why the minorities is lower than what we had indicated in our own assumptions.
Great. Thank you very much, guys.
You're welcome.
There are no more questions at this time.
There's no more questions. We say thank you very much for listening in and looking forward to see you next time again. Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect.