Welcome, thank you for joining the NTG Nordic Transport Group second quarter 2023 results conference call. As a reminder, all participants are on 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 Michael Larsen, Group CEO. Please go ahead, sir.
Thank you. Welcome to our Q2 2023 conference call. Thank you for dialing in. If we move to page 2, we kindly ask you to read the important notice provided in this slide. Then let's move on to page 3. Here you see the presenting team of today. My name is Michael Larsen, I'm the Group CEO of Nordic Transport Group, and with me today, I have Christian Jakobsen, our Group CFO. Let's move on to page 4. Here you see the agenda for this conference call, which includes highlights for the second quarter of 2023, a review of the financial performance of the group and the two divisions, a presentation of other key figures, and the updated outlook for 2023, and the reiteration of our midterm target.
By the end of the presentation, the line will be open to questions from the audience. Let's move on to page 5. These are the main highlights. In the second quarter of the year, the market conditions continued to be challenging, especially in the Air & Ocean division. Inflation is still high, although it's declining. Interest rates have continued to rise during Q2. Consumer confidence remains muted. As a consequence, volumes are still relatively low, and there is still an overcapacity in the market, which increases competition and puts prices under pressure. This dynamic has translated into a continued decline in organic growth in both of the divisions. Air & Ocean remains the most affected due to the low freight rates and slowdown in volumes.
In the Road & Logistics, the spot market is still weak, and fuel prices further contributed to the negative development in revenue. In general, the market has moved more towards the normal, and the division delivered a solid result with a quarter-on-quarter increase in the operating margin. In Air & Ocean, the destocking cycle is still more persistent than first expected and continues to create a drag on shipping volumes.
In addition, the macroeconomic environment further contributes to negative development in the volumes. Finally, the lower-than-expected level of activity for Q2 and July led us to update our full year outlook on August 3rd, 202 3. The guidance now reflects an adjusted EBIT between DKK 600 million and DKK 650 million for the full year of 2023. With those words, I'll now hand you over to Christian, who will take you through the Q2 financial results. Christian, please.
Thank you, Michael. On page 6, you find the main financial highlights for the group. Net revenue for the second quarter of 2023 totaled DKK 2.1 billion, which is a decrease of 22% versus the same period last year. Organic growth contributed with -24% due to the challenging market environments for both divisions, while currency translation effects had a negative impact of 1.8%. Gross profit decreased by 10% to DKK 482 million, corresponding to an increase in gross margin from 19.5% to 22.7% year-on-year.
Adjusted EBIT decreased 32% to DKK 148 million in the second quarter, corresponding to an operating margin of 7% versus 8% in Q2 2022, reflecting lower conversion ratios in both divisions, and especially in Air & Ocean compared to last year, due to the lower total gross profit and continued investments in our sales organization. To counter the decline in the conversion ratio, both divisions have implemented cost reduction measures during the quarter, mainly by reducing white-collar headcount.
If we move to page 7, you see a summary of the key financial performance indicators. As illustrated to the left, the gross margin development for the group was mainly impacted by an increase in both divisions when compared to last quarter, as well as the same period last year, primarily due to lower rates, which allow a higher gross margin. In the middle of the slide, you see the conversion ratio, which decreased compared to last quarter and the same period last year. The development was driven by a combination of lower revenue and, consequently, lower gross profit, despite higher gross margins.
Fixed costs were decreased less than gross profit due to continued investments in both organizations. As mentioned earlier, both divisions have reduced capacity and white-collar headcount in order to react to the market conditions. On the right-hand side, you see the development in the operating margin, which declined 1 percentage point compared to the same period last year, but increased compared to last quarter. The year-over-year development is mainly driven by the Air & Ocean division, while the Road & Logistics division managed an increase in operating margin from last quarter and realized a solid margin of 7.9%.
If we go to slide 8, you see the financial review of the Road & Logistics division. The division generated a net revenue of DKK 1.6 billion in the second quarter, which was 12% below the same period last year. The decrease was mainly related to organic growth, which fell by 10% year-on-year, driven by a combination of lower rates in the spot market, lower fuel rates, and lower volumes, mainly in Sweden, while continental Europe was more robust. Finally, currency translation had a negative effect of 2%, especially the valuation of the Swedish krona, which has a negative impact of DKK 59 million. Gross profit decreased 6% to DKK 360 million, corresponding to a gross margin of 22.9% versus 21.5% in Q2 2022.
The conversion ratio decreased by 5.3 percentage points year-on-year, mainly due to the combination of lower gross profit and continued investments in the sales organization. Adjusted EBIT decreased 18% to DKK 124 million in the second quarter, while the operating margin declined to 7.9% from 8.5% last year, but reflecting a quarter-on-quarter increase up from 7.1% in Q1 2023. As in Q1, the division adjusted capacity and the cost base during the quarter is in response to market conditions. If we flip to page 9, you see the financial review of the Air & Ocean division.
The division generated a net revenue of DKK 546 million in the quarter, which was 43% lower than the same period last year, composed of organic growth of - 49%, mainly driven by the continuing destocking cycle and lower volumes. The acquisition of AGL contributed with 8% being included in inorganic growth with one month during the second quarter. Gross profit decreased 18% to DKK 122 million, corresponding to a gross margin of 22.3% versus 15.7% in Q2 2022. This development was mainly due to the sharp decrease in freight rates compared to last year. Adjusted EBIT declined 63% to DKK 24 million, corresponding to an operating margin of 4.4% versus 6.7% in Q2.
This, the margin increase was driven by a conversion ratio development of - 23 percentage points due to the lower absolute gross profit and continued investment in sales, though partly offset by further cost reductions in the division. If we flip to page 10, you see an overview of all the key figures. On the left, you see the net working capital increase to - DKK 73 million as at June 2023. The quarter-on-quarter development in net working capital was impacted by the ongoing merger of four mature subsidiaries in Sweden, where suppliers were paid up front during June.
The adjusted free cash flow totaled DKK 28 million in the second quarter of the year, compared to DKK 153 million in the same period last year, driven by lower operating performance and an increase in net working capital. Finally, to the right, you see the net interest-bearing debt excluding IFRS 16, which totals DKK 361 million by the end of Q2 2023. If we move to page 11, you see the updated full year outlook for 2023, which we announced on the August 3rd, 2023 .
For the full year of 2023, we now expect an adjusted EBIT in the range of DKK 600 million-DKK 650 million. The updated guidance is a result of the lower-than-expected results during Q2, especially in June. The activity was lower than we expected, which continued into July. The updated outlook assumes that activity will pick up gradually during the second half of the year, and that market conditions within Road & Logistics remain stable.
Finally, the outlook assumes that the Air & Ocean market will remain challenging, with low rates and soft volumes. While we updated our full year outlook for 2023, we maintain our midterm financial target that you see on page 12. No later than end of 2027, we strive to achieve DKK 1 billion in adjusted EBIT. The target is based on a combination of organic growth and M&A, financed by our cash flow and credit facilities. No assumptions of capital raises are included, although we will evaluate this source of financing for larger acquisitions.
Finally, the midterm target assumes no additional material adverse events affecting regional or, and global cargo volumes and trade patterns. NTG continuing to develop the business, establish new startups, and execute its M&A agenda. That was all what we had planned today. Moderator, please open the line for Q&A.
Thank you. This is the conference operator. We will now begin the question-and-answer session. Anyone 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 with a question may press star and one at this time. The first question is from Dan Togo of Carnegie. Please go ahead.
Yes, hello, Dan Togo here from Carnegie. Yeah, hi. Firstly, on your guidance, you seem to imply that the second half will be stronger than the first half. When I look into, for instance, your peers like DSV, they are a bit more cautious to have such a claim. Can you please explain? Because I don't expect them to have different seasonality than you may have. You're also highlighting here that, well, the usual peak season is not really happening at the moment. What exactly is it that we should look out for that takes second half above first half? That would be the first question.
Please bear in mind that our, we have our biggest division is the Road division, and that you see the seasonality, where we normally see that with Black Friday, Christmas, and everything, and Christmas trees and all these things that we have in our Road division. We are normally seeing that this seasonality, and we still, even though that the market is soft, we still expect the seasonality to come again.
Okay, are, are there other impacts, I, I guess, because that probably feeds into my next question on, on the integration of, of AGL? One of the disappointments, at least compared to my estimates here in Q2, was definitely in the A&O. Can you give us some comfort, in, in, the way that AGL is developing, and whether it's on track and whether, the underlying development will have any impact on, the earn- out?
Yeah, what we have been of course, in contact with the MD of AGL, and he still believes that he will reach his full earn- out. You know, we had made it as a stair, so it might not be that he comes to the last step on the staircase, but definitely he will probably come very close if he's not reaching the staircase. We believe that he will still reach it. Please, when you see our figures, it is including group cost and other things, so you can't compare it one to one with what...
Also please remember what we earned last year, and, and, and so on. It still is, it, it, it looks a little bit lower than it, it, it really is, and actually, we have been invested in, in also, when all the, all the issues should, you know, we have been invested in new salespersons in our organization. We expect also that we will, we will benefit from that. We also have reduced our, some of staff in, in, in, in June and July, where we will also see an effect of that in the second half. Besides the normal seasonality there will also, we expect some effects from, from that.
Can you also shed some light on the sales organization? You are, you are in the midst of, of ramping this, this up, and that is also triggering additional cost, I guess. Can you share a bit color here? How big is the sales organization now versus the start of the year, or maybe, well, compared to when you took over AGL?
I don't think I will give you any specific details on that, but I can say that in the Ocean division, all countries have at least one extra, and some of them have more than, than one extra in the sales organization. We definitely, also expect that they will bring some new business to us.
Okay. Just final question here on the M&A side. You, you highlight that, you know, price spreads has been quite wide due to the recent strong performance, and now they are more aligned. Given the underlying, excuse me, operational performance, would you rather now have a road acquisition than an A&O acquisition? I don't know if you can give some color on how you see this developing and how close you are to making a transaction here in the next, let's say, six to 12 months.
I can't give you an answer on the last question, you know that. I can say that you're right. We would like that we have our CargoWise 100% implemented and the full setup before doing big acquisition within the Air & Ocean. Still, we're following the plan for rolling out our CargoWise to our countries, and that plans means that we should end before last in June next year.
That means we could buy a company, but, but still, we would like that we have a clear plan for rolling out very fast, to, to our group systems when we're doing the acquisition. I think of course we would, but, but we will not say that we won't buy anything in Air & Ocean, but I'd probably be a little bit more eager to buy something within the Road at the moment. Both divisions we could do the acquisitions, but, yeah, to be honest, we are very eager to do, to buy acquisition, to find the right acquisitions in, in Road.
Sounds good. Thanks a lot.
The next question is from Michael Vitfell-Rasmussen of Danske Bank. Please go ahead.
Yeah, thank you very much. A few questions from me. I'll, I'll take them 1 by 1. First of all, do you believe that you've grown in line with the underlying markets, or above or below? If you could just go through both Air, Ocean, and Road, please.
Now I, I haven't studied all our competitors deeply, it seems that, that, that for road, please remember we had benefited a lot and, and, and did a lot on the spot market last year. We're not operating that anymore, so we are probably at, at declined a little bit more in the road than, than that. Also we have also won a good fixed contract, so probably it, it is very close to, to what the market have. I believe also please remember the geographies where we are operating. We have a lot of trucks coming to Sweden, and, and Sweden has been a very difficult market this year. Don't have the, the country-specific, numbers for our competitors, but, but we're close to being in line with the others.
I think in ocean, we have declined a little bit more. We are re-relying on, on the spot market, and, and, and the competition in the spot market is just very fast, and they are asking more suppliers for, and for rates. Yeah, I think it's, it's more volatile than, than you see on, on the fixed market. There we probably have, have, have, have a loss a little bit more than, than the, than the, the competitors. We can only see the big competitors, and they are operating in another market for the air and ocean.
Just a follow-up on, on that, because one thing being your larger competitors on the forwarding side, what about the, the asset owners that either have their own capacity or have either leased planes or, or, or vessels? Are they kind of dumping the market right now, or are they behaving relatively rational in, in, in both Air & Ocean?
Please also bear in mind, we are not competing. They are, they are competing about the big clients with the, with the big freight forwarders. I think they are, we are, we are not, we are not seeing them a lot on, on, on the smaller customers that, that, that we are operating. I think they are more focused on, on, on, on the segment of, of the big guys and not the SME segment. I think I'm honestly, I can't answer that, Michael, sorry.
Just thinking a little bit forward here. Obviously the pickup comes a bit later that than you had hoped for, and, and you're definitely not the only ones sharing that. I believe it's very much the same as we're seeing from, from DSV and Maersk today. Just thinking forward, so, you know, do you believe that this will end up with actually volume-wise, 2024 being, being a relatively good year?
That was a good question. To be honest, we, we are not, we are not be- started be- thinking about 2024. We have, we, we will start the budgets very soon. So, so, so, so I, I, I don't have an opinion about that yet. We, we have, yeah, we, we just come, came out with a new guidance and had to work all our Excel sheets through and so on. So I think it's a little early for us to have, to have an opinion about 2024 at, at, at the moment.
Okay. Just a final question, in terms of both partners and and also kind of what are you seeing there? Anyone coming up for exits? I believe that you will also see some new shares being available for sale at the anniversary of the IPO later this year. Anyone that has been ringing the bell or anything we should be aware of here?
I don't think we have any news to, to report there.
Okay, great. Thank, thank you very much.
Thank you.
The next question is from Ulrik Bak of SEB. Please go ahead.
Yes. Hello, Michael and Christian. A couple of questions from my side. Firstly, the quarterly result was obviously affected by the challenging conditions in your Air & Ocean division, but can you perhaps provide some color on the underlying dynamics in each of these two segments? How did volumes develop? How did yields develop? And also, what were the exit rates heading out of the quarter compared to what we saw as the average for Q2? Thanks.
I think we saw volumes decline, and we also saw yields decline in the Air & Ocean. We also saw that prices also on fixed contracts were going a little bit down in the road division in Q2. We had been out check, and then please remember that diesel was, yeah, was there was no diesel additions in Q2 almost. You also saw that affecting the Q2 for the road division.
Okay, any color whether, you know, ocean volumes were down less than air, like we've seen from some other of your competitors? Any, any flavor here?
I think we would, we would prefer not to, to comment on, on, on, on, on the, on the volumes in the 2, in, in the division. As we are, we are in the middle of implementing CargoWise, and that also mean that we, we need to be 100% sure that, that it counts the same way as it did before. So, so I would prefer not to, to give you any, any colors on, on, on, on, on that, until we have CargoWise fully implemented, and we know we are comparing apples with apples.
Okay, understood. To the absolute earnings in Q2, in Air & Ocean, that is roughly on par with what you earned in Q2 2 years ago, in 2021, before your acquisition of AGL. I know that such comparison may not be fair, as you've invested a lot in the organization, volumes have more or less disappeared. To put these organizational investments into perspective, could you perhaps talk about how much more volumes that the ones you saw in Q2, your current Air & Ocean organization will be able to handle, compared to what you saw in Q2? Is it 10% more, 20% more, 30? Just to get a feel of when you would need to invest more in the organization. Thank you.
Now, it is also depending from country to country, and some countries have already cut the staff, and some have are still expecting. Please remember, it is also if you have two people in small organization, that we also a little benefit from our soft skills, that it would be difficult because you have to have a replacement for holidays and people are sick. It is really difficult to give you a flavor, but I am sure that if we are increasing the volumes with 10%, we don't need to add people in general. Some places we might also be able to do it with 20%. It is difficult to do it.
What we are doing, we're sitting and having this conversations on, on, on department for department, because even though that it, it, you have, it, it is often, it's often different people that makes sea export and sea import or air export and, and sea export. So, that, that, that, that will probably often be two different departments and two different. So, you can't just, you have to do it department-wise, and, and therefore, it is really difficult for me to, to come with a, with a figure. But definitely, if I think, if, if we are increasing with 10%, we don't need to adjust anything, and some locations, we can also adjust, put 20% more in.
Also, we are also expecting productivity increase from, from, from CargoWise. When they are just getting used to, to CargoWise and, and, and then, then, we also expect to see an, an improved, productivity in, in the different countries.
Right. That's, that's very clear. Then perhaps some color on, you know, the new AGL organization versus the old entity, Air & Ocean. Have they performed differently during Q2? You, you allude to that, the MD of AGL still believes that they could end and then meet, you know, the earn-out targets. It seems as if, you know, the old Air & Ocean entity may have underperformed slightly, or is, is that a correct interpretation?
I think it would be fair to say that it's also different, that you can't just take the, the old, old entity organization and, and put them together as one. It, it is fair to say that AGL has performed better than the combined former entity organization throughout the quarter. We also have, still have countries that have performed very well in, in the second quarter, or will at least, in our, in our Air & Ocean division. Yeah.
All right. Then my final question is to your guidance. What needs to happen for you to reach, you know, the upper and lower end of your guidance? Is it primarily in Road that's gonna move the needle, or is it also Air & Ocean, even though it's not that big earnings-wise compared to the group?
I think we, we definitely believe that Air & Ocean should also be better than what we saw in, in, in, in Q2, for sure. As I said, we, we need to see some effects from, from, from the sales investments to reach the top. We also see that, have to see that the market is not giving us that much headwind as we feel we experienced.
That's very clear. Thank you so much.
Thank you.
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Okay. Thank you very much. Thank you for listening in, and we'll be happy to see you again on the next call. Thank you very much.
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