Good morning. This is the conference operator. Welcome, and thank you for joining the NTG first quarter 2023 earnings call. 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. Christian Jakobsen. Please go ahead, sir.
Thank you, and welcome to our Q1 2023 conference call, and thank you for dialing in. If we go to page two, we kindly ask you to read the important notice provided in the slide. If we move to page three, my name is Christian Jakobsen. I'm the Group CFO of NTG Nordic Transport Group, and today I will take you through the financial results of Q1 2023. If we go to slide four, you see the agenda for this conference call, which includes highlight for the first quarter of 2023, a review of the financial performance of the group and the two divisions, a presentation of our key figures, and the outlook of 2023. By the end of the presentation, the line will be open to questions from the audience.
If we move to page five, these are the main highlights. In the first quarter of the year, we experienced challenging market dynamics. The supply chain disruptions of the past years are gone, and instead, the market is now characterized by some degree of overcapacity. At the same time, the global macroeconomic situation adds to the challenging market conditions. Consumer confidence remains muted, interest rates are still rising, and inflation is still elevated. The combination has resulted in lower volumes as well as lower rates, especially in the Air & Ocean division, but to some extent also in the Road & Logistics division. As a result, both divisions have seen a decline in organic growth.
The development was largely as we expected, with the Air & Ocean being affected the most due to the large decline in freight rates and the Road & Logistics being affected by a weaker spot market. The guidance provided on the 8th of March, 2023 was maintained, for the full year of 2023, we expect to achieve an adjusted EBIT of DKK 620 million-DKK 700 million. If we move to page six , you see the main financial highlights for the group. Net revenue for the first quarter of 2023 totaled DKK 2.3 billion, which is an increase of 3.5% versus the same period last year. Organic growth contributed was -7%, while the acquisitions of AGL , Kontinent Transport, and Solida contributed with 12.5% for the quarter.
Currency translation effects had a negative impact of 2.1%. Gross profit increased by 11% to DKK 477 million, corresponding to a gross margin of 21.2% versus 19.6% in Q1 2022. Adjusted EBIT decreased 6% to DKK 250 million in the first quarter of 2023, corresponding to an operating margin of 6.7 versus 7.3 in 2022, reflecting a moderate market decrease in the Road & Logistics division and a margin decrease in the Air & Ocean division as well. If we move to page seven, you see a summary of the key financial performance indicators, and it's illustrated to the left.
The gross margin development for the group was impacted by an increase in gross margin across both divisions when compared to last quarter as well as the same period last year. The gross margin within Air & Ocean division increased significantly compared to the same period last year, mainly driven by the significant decline in freight rates. In the middle of the slide, you see the conversion ratio, which on group level decreased compared to the same period last year, driven mainly by the Air & Ocean division, where lower freight rates translate into lower absolute gross profit figures and coupled with investment in the sales organization led to a lower conversion ratio. In the Road & Logistics business, the conversion ratio also fell mainly as a result of investment in sales organization.
On the right-hand side, you see the development in the operating margin, which decreased compared to the last quarter, mainly due to the developments within the Air & Ocean division, which was due to the challenging market and lower freight rates. The operating margin in the Road & Logistics division also saw a slight decline. If we go to slide eight , you see the financial review of the Road & Logistics division. The division generated a net revenue of DKK 1.6 billion in Q1, which was 2.5% lower than the same period last year. The decrease was related to a slight drop in organic growth corresponding to a -1 .2%, driven by lower volumes and spot market. Start-ups and M&A contributed with 0.2% and 1% respectively.
Currency translation had a negative effect of 2.5%. Gross profit decreased 1% to DKK 348 million, corresponding to a gross margin of 21.1% versus 28.8% in Q1 2022. Adjusted EBIT decreased 7% to DKK 117 million in Q1, while the operating margin fell to 7.1%. The conversion ratio increased to 33.6% compared to 35.8% in Q1 2022. If we flip to page nine, you see the financial review of the Air & Ocean division. The division generated a net revenue of DKK 605 million in the first quarter, which was 24% above the same period last year. Hereof, a organic growth of - 28%, driven mainly by the significant lower freight rates coupled with declining volumes.
Gross profit increased 67% to DKK 129 million, corresponding to a gross margin of 21.3% versus 15.8% in Q1 2022. This development was mainly a consequence of market development, where lower freight rates allowed for a higher gross margin. Adjusted EBIT decreased 6% to DKK 32 million, corresponding to an operating margin of 5.3% versus 7% in Q1 2022. This margin decrease was driven by a negative development in the conversion ratio of 19.4% due to more challenging market conditions and lower freight rates. The division has taken measures to reduce the cost base to the current market conditions, especially in the U.S. The measures have been mainly executed throughout the quarter and therefore not fully reflected in the figures of Q1 2023.
If we flip to page 10, you see an overview of all the key figures. On the left, you see net working capital increased to - DKK 140 million at the end of March 2023, as in previous quarters. This was mainly driven by the acquisition of AGL. The adjusted free cash flow totaled DKK 45 million in the first quarter compared to DKK 74 million in the same period last year, mainly driven by the increase in the net working capital. Finally, to the right, you see the net interest-bearing debt, including IFRS 16, totaled DKK 220 million by the end of Q1 2023. If we move to slide 11, you see our full-year outlook for 2023 that we provided on March 8.
We maintain our full-year expectation of an adjusted EBIT of DKK 620 million-DKK 700 million. The full-year outlook is based on an expectation of a weakening macroeconomic environment in the first half of 2023 and a gradual rebound in activity in the second half of the year. That was all what we had planned for today. Operator, 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 Michael Rasmussen of Danske Bank. Please go ahead.
Thank you very much, well done, Christian, on navigating in these challenging markets. Three questions from me to start with. First of all, you mentioned cost initiatives a little bit, I think, in the report here. Can you put any numbers to how much you have taken out in Q1, and whether this number will be bigger going forward in the quarters to come? My second question is, if you could talk a little bit about the momentum during Q1, and also if you could add any flavor to what you're seeing right now. Is it your impression that customers have started to rebuild inventories? My final question is on the Air & Ocean division.
Which part did better, which part did worse? Are you starting to see the carriers on the ocean side, being really, really aggressive on pricing? Thank you.
Thank you, Michael. I will not give a number on the number of employees, and we are not 100% done, so there will be some adjustments also in Q2. As for the momentum, as a when I speak with our managing directors in the countries, then they say it's a little bit spring, but that we are still very cautious about what we are seeing.
We haven't seen any light, but maybe we are seeing that it is getting a little bit better, but we'll have to await the next couple of months to see whether it really picks up or it's just a flinch because we are seeing that people are buying everything for their terraces and gardens and everything. It might be a little delayed spring this year. Yeah, it's, it's no secret that we also expected that the destocking in the U.S. would be harder and in particularly January and February, they were very slow in particular in the U.S. March picked up.
Of course, we also had more working days in March and no holidays. That was what we saw. We haven't concluded anything on the destocking. I still believe that the destocking cycle is ongoing and hopefully it will end here throughout Q2. What we haven't seen the end of the destocking cycle that we are in particular in the U.S.
Thank you. On the Air & Ocean path and some comments on the carriers. Now suddenly they have lots of capacity, I guess.
Yeah. The carriers, it seems like they are actually trying to get the prices a little bit up, so they're not as aggressive as you might have expected. Maybe they are, yeah, a bit of. I think also they are close to being unprofitable. So, you know, it might also make sense that they're not being too aggressive.
Great. Thank you.
The next question is from Bak Ulrik of SEB. Please go ahead.
Yes. Hello, Christian. Also a couple of questions from my side. Also on the Air & Ocean, I noticed that the M&A contribution in Q1 on revenue was DKK 256 million and DKK 12 million on EBIT. I assume this contribution is entirely from the AGL's acquisition from last year. back then, when you acquired AGL, it made around DKK 540 million revenue and DKK 25 million in EBIT. this decline in contribution both on revenue and EBIT, is that solely driven by the market development with lower volumes and rates, or have you lost any customers or are there any internal reasons for this significant decline? That's the first question. Thanks.
Please also bear in mind, we also had some in the U.S., so it is a calculation using some method that. Therefore it's not 100% fixed that the edit we have put in, but it's very close to. We have also lost customers in the U.S. and we have also experienced some of the bigger competitors attacking us. We are getting attacked each day, so it's nothing unnormal. Of course, when the market is a little weaker than people are trying to gain volumes, and we are also trying to gain volumes. Yeah, it's a harder game out there.
Before you had the customer, if you could service him, now you, we are seeing that everybody attacks each other's customers. I think that... As I said, U.S. in particular, January and February, that was slow months. We also saw that on the statistics, it picked up some in March.
Okay. In that connection, I know that the last part of the earn-out for AGL is based on 2023 earnings. Given the start to the year, yeah, can you say anything about the threshold for this earn-out and how likely you consider it to be paid out, and any comments would be appreciated. Thanks.
The earn-out was based on the 2021 figure, and they were not as elevated as what we saw in 2022. We are still within, in the ballpark of the earn-out. We still expect to pay them out, but of course they are a little behind, currently.
Okay. Then my final question on costs. I noticed that other external costs were down 26% sequentially. What is the explanation for this significant decline, and is it sticky when looking at the coming quarters, or is there any seasonality in that number?
I think you might have not used the restatement when you're using that figure, Ulrik .
Okay. But then perhaps...
All that we have moved around DKK 15 million a quarter from Air & Ocean to Road, where we moved Hungary, France and Switzerland from the Air & Ocean to the Road division.
Okay. This was on the consolidated numbers. Okay. Then again, a question on the Air & Ocean cost side. You cut the cost quite significantly also sequentially. Is that? What's the mix between FTE reductions versus other external costs? Any color on that would be appreciated.
We had in the Air and Ocean, we had two offices in L.A. until December last year. That was one of the reasons. But we have, we have. The cut will be mainly in the staff cost.
Okay. Understood. Thank you. No further question at this time.
The next question is from Lars Heindorff of Nordea. Please go ahead.
Yeah. Morning. Thank you for taking my questions. I'll just take them one at a time. If we start on Air & Ocean, we've been discussing this before, and I know that you don't disclose your volume growth, but it could be interesting if you give a little bit of a flavor on yields and maybe also volume and maybe, I don't know, if you can talk shipments instead if you prefer that. Development. I think you've been fairly, at least my sense, downbeat about the development in AGL and particularly in the U.S., at least, in the latter part of 2022. If you've seen any signs of improvement here as we enter into 2023 and in particular sort of the exit rates as we head into Q2?
I think we have seen declines in both volumes and it is double- digit declines in volumes. We also seen that we are earning less gross profit per tour, per shipment as what we did last year. We are experiencing both in yields and in volumes in our Air & Ocean division. It's particularly in the U.S. but also in Germany, whereas the Nordics, they are holding up okay. It's a little mixed of what market we are operating in.
The decline that we've seen in the top line, the -29% organically, in the first quarter. Just to get a sense because, I mean, we have now seen that you mentioned that yourself, that at least ocean rates have stabilized, air is still going down. I mean, would it be appropriate to think about Q2 roughly the same kind of decline as we have seen in Q3, sorry, in the first quarter, or should it be better, you think?
It's very hard for me to say, but my own guess and my own, yeah, is that we have seen that the rates are bottoming out and therefore, and but as you also know, capacity is coming in, so we would be very hard for me to tell you what will happen. I think that it seems like that the carriers that the prices have bottomed out on the ocean and also we might see something where when the there's still I think a little belly capacity coming in from on some of the lanes. That might also go a little bit down, but on the Air.
I think we're close to the bottom in both Air & Ocean.
Okay. Then, on, maybe this is sort of a housekeeping question, but it's on the start-ups. Small positive, very small positive impact on Road & Logistics.
Yeah.
A little bit bigger in Air & Ocean.
Yeah.
What are you starting up, just to get a sense for, is any geographical area? Are you starting something new up?
Yeah. It is the two start-ups from last year that were the Air & Ocean in Czech and in NTG Care in Denmark.
Okay. nothing new besides those two?
No, no, nothing new, no.
Okay. Last but not least, maybe a status on, we've been also been talking about this before on LGT, implementation of IT systems and integration into the rest of the organization. Maybe a status on that one.
Yes. We went live with LGT in Sweden, we experienced a very smooth start. I always say that if I don't hear anything, then it's going very well. But actually we also got that confirmed. It's running very smooth and everybody gets their goods delivered on time. Yeah, we're very happy about this setup. Now it's only Denmark we have left. Finland was in November, now it's only Denmark, and they have already started on that. Also for AGL , for the CargoWise, we roll out our first in March, now it is Norway and Sweden, 1st of June.
Yeah, it looks promising and seems like we have the right enterprise platform for that rollout, and then we will just roll at least once each each months we will roll the rest out and follow the plan until end of first half 2024 for the AGL . Yeah, we're very close here.
Thank you.
The next question is a follow-up from Bak Ulrik of SEB. Please go ahead.
Yes, thank you for taking my follow-up question. Just on your share buyback that you announced of DKK 125 million. In that context, will there still be room in the short- term for further M&A activity? In terms of M&A, previously you've stated that the seller's price expectations were a bit too far from your expectations. What is the latest on that? Thanks.
I think we are currently around 1x EBITDA. We have said that we will go up to 3x EBITDA. We definitely believe we have room for acquisitions. Just doing the math, there will be pretty much room, and we have good agreements with the bank. That is also that should also work. Yeah, we are seeing that the sellers are climbing a little bit down the tree and they have climbed a little bit more down. Hopefully we will see them, we will be able to make some deals this year. Yeah, it is getting more and more bright on that side.
We are definitely having good dialogues, now starting opening and they don't come out with the expectation that they will earn more in 2023 as they did in 2022, which we have seen, yeah, quite some time. Definitely we are now coming into a more normalized situation where we not should only agree on the multiplier, but also, it's easier to agree on the EBIT that you're using for the deal.
Okay, that makes sense. Then perhaps a final question from my side. To Road & Logistics. Just the market outlook here, you've previously stated that it's fairly stable both in terms of volumes and yields. Normally Q1 is the weakest one seasonal-wise. But do you see any risk of a delayed negative spillover effect from a weak Air & Ocean market which could impact Road & Logistics negatively later in the year?
We are also always worried about what will happen. That's why we have our agile model. If something comes over and then we will be able to adjust our capacity very fast. I think we have adjusted the whole ESR where we can get them down, I don't think there's any room there if they still have to survive. I think we have squeezed what we can and that means that if something happens then we will have to look at the capacity.
As you know, we're able to adjust very fast and we're looking at and the consignments on a weekly basis and from group side. Of course they're looking at it on the operational, daily side. We will adjust it if it's necessary.
That's very clear. Thank you so much.
The next question is a follow-up from Lars Heindorff for Nordea. Please go ahead.
Yeah. Thank you. A couple of follow-ups on my part as well, yeah. On, if we stay on the balance sheet side of things and cash flow, I would have thought, maybe I'm wrong, but I would have thought that given the decline in volumes and in rates, particularly in Air & Ocean, that you would have seen a bit of a more of a release of net working capital here in the first quarter, compared to what you actually reported. I might be wrong, but maybe just to get a sense for will we see some further impact and release of net working capital as we head into the second quarter as well? Or how should we think about this?
I think that we saw the most relief that we will see in the fourth quarter. Traditional, the first quarter is not a very, well, is a quarter where we have a higher net working capital. I think we saw the most of the relief we would see release in was we saw that in Q4. We are on a negative level with the net working capital. I think it would be difficult to see us improving that if you look at each quarter. We are now with a bigger part of the Air & Ocean that we are also satisfied with the level.
Of course we will do our best to improve it, but we are very close to being satisfied with the level of net working capital.
Okay. Regarding the restated numbers, if I look at what you have restated and what you actually recorded before the restatement, then the difference on the gross margin in Air & Ocean is around about 1.5 percentage points.
Mm.
lower. Yet you've reported a very significant jump in the gross margin here in the first quarter. Just to get a sense of, you know, to recalibrate , if you understand what I'm trying to say here. You know, the gross margin levels going forward. I mean, is this sustainable, above 21% if you look into the rest of the year?
I would say I have no reason to say anything else, but of course if, and that means that if the market is keep being like stable, then I have no reason to conclude anything else.
All right. Very, very clear. Thank you.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Mr. Jakobsen, there are no more questions registered at this time.
Okay. Thank you for listening in, and we will come back after Q2. Thank you very much.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.