Ladies and gentlemen, thank you for standing by, and welcome to the Nordic Transport Group Q2 2021 analyst call. At this time, all participants are in listen only mode. I will now hand the conference over to the speaker today, Michael Larsen. Please go ahead.
Thank you. Welcome to our Q2 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, and then let's move on to page three. Here you see the presenting team of today. My name is Michael Larsen, and I'm the Group CEO of NTG Nordic Transport Group. With me today, I have Christian Jakobsen, our Group CFO. If we then move on to the next page. Here you see the agenda we intend to go through on the call today, including the Q2 highlights, a review of the financial performance and other key figures, the full year outlook provided on the 1st of July, and an overview of the acquisition of LTG Group announced on the 16th of July.
At the end of the presentation, the line will be open to questions from the audience. Move on to page five. These are the main highlights for the second quarter. Overall, the second quarter represents yet another strong quarter, with significant growth in both our divisions. The second quarter was characterized by continuing extraordinary market conditions in Air & Ocean, with no expected near term signs of normalization, especially within the ocean freight, and high activity as well as a capacity shortage in the Road & Logistics division. The double-digit growth and strong financial performance that was realized in Q2 clearly reflects the ability of the organization to adapt to the challenging market conditions. During the second quarter, we also announced the acquisition of Twente Express and Neptun Transport, and after Q2 on the 16th of July, the acquisition of the NTG Group.
Finally, we updated our full year outlook on the 1st of July 2021. We maintain the guidance of the revenue between DKK 6.3 billion-DKK 6.7 billion, and an adjusted EBIT between DKK 450 million-DKK 490 million. With those words, I'll now hand you over to Christian, who will take you through the financial results.
Thank you, Michael. As Michael said, we're very proud of the results in the second quarter, and we are very pleased to see that the strong momentum continues, and that performance in both divisions exceeded our previous expectations. On page six, you see the main financial highlights for the group, where net revenue in Q2 totaled DKK 1.7 billion, up 39.4% versus Q2 2020. The positive development in organic growth continued with an increase of 31.3%, while effects from acquisitions within Road & Logistics contributed 8.1%. Adjusted EBIT increased 146% to DKK 138 million in Q2 2021. The increase includes the net positive one-off effect of DKK 20 million in the Road & Logistics division related to the early termination and reassessment of previously prepared lease agreement for an office and logistics facility in Switzerland.
Moreover, the increase in adjusted EBIT was driven by organic and acquisitive growth in gross profit and an increase in the conversion ratio in both divisions. The operating margin was 8.0% for Q2 2021 and 6.8% when adjusting for the one-off effect in Switzerland. If we move to page seven, you see the summary of the key financial performance indicators, which illustrate that the extraordinary situation in the Air & Ocean market and capacity constraints in certain growth markets leading to a price pressure, had a negative effect on gross margins in Q2 2021 compared to recent previous quarters. However, the reorganizations and restructuring initiatives completed in 2020 and efficiency improvements in both divisions supported a continued upwards trend in the operating margin for both divisions.
Again, please note that the operating margin was 6.8% on group level if we adjust for the net positive one-off effect compared to 4.5% in Q2 2020, and 7% for the Road & Logistics division compared to 5.4% in Q2 2020, as illustrated with dotted lines in the graphs. If we go to page eight, we see the financial review of the Road & Logistics division. The division generated a net revenue of DKK 1.3 billion in Q2, which was 36% above same period last year. The increase was mainly driven by organic growth that contributed with 25.2% and acquired growth driven by the acquisitions of Saga Trans, TB International, Cargorange, Twente Express, and Neptun Transport that contributed with 10.3% for the quarter. Total growth for the period was 36%, including effects of 0.5%.
Adjusted EBIT increased 140% to DKK 113 million, corresponding to an operating margin of 8.5% versus 5.4% in Q2 2020. As I said, the operating margin was 7.0% if we adjust for the one-off items. Then if we flip to page nine, you see the results for the Air & Ocean division. The division realized a net revenue of DKK 394 million for the quarter, which was 52.2% above the same period last year. The organic growth was driven by higher Air & Ocean rates globally, and off-base activity increases, together representing a growth of 52.3% in existing business. In general, we continue to benefit from the extraordinary Air & Ocean market conditions that continued to redirect volumes to the open market in Q2 2021, as customers search for competitive prices and security of capacity.
A startup in the U.S. contributed positively to the total growth with 7.2%, while the closed down and divestment of activities had a negative effect of 5.3%. Gross profit increased approximately 25% for the quarter, while the gross margin decreased 4.4 percentage points. The development was driven by a combination of mix effects and some margin pressure as freight rates increased significantly compared to the same period last year. Adjusted EBIT increased approximately DKK 2 million from the second quarter last year to DKK 25 million in the second quarter of 2021, corresponding to an operating margin of 6.2%. If we flip to page 10, we see the highlights of other key figures.
On the left, you see the net working capital decreased to DKK -136 million as per June 30, which was higher than last year, and related to increased activity during Q2 2021, and the extraordinary circumstances in the Air & Ocean division, and the benchmark period affected by the COVID-19 deferred payment schemes last year. Adjusted free cash flow came to DKK 98 million in the second quarter, as illustrated in the middle, which was below the same period last year. Final to the right, you see net interest-bearing debt excluding IFRS 16, that decreased to DKK -186 million, mainly due to the normalization in net working capital, partly offset by the acquisition of Neptun and Twente acquisitions.
By the end of the quarter, we had a net cash position of DKK 186 million, and on top of that, we had a committed facility of up to DKK 500 million. If we go to slide 11, you see the full-year outlook for 2021, which we announced on July 1st. We maintain this guidance, and for the full year of 2021, we expect a net revenue in the range of DKK 6.3 billion-DKK 6.7 billion and adjusted EBIT in the range of DKK 450 million-DKK 490 million. The guidance includes the chosen net of one-off effect of DKK 20 million described before, and includes the expected effects of acquisitions already closed. On the right-hand side, you see the assumption underlying our guidance that relates to the current market condition in both divisions.
As a concluding remark, Michael will now briefly present our latest acquisitions, which is the largest acquisition in the history of NTG in terms of total consideration.
Thanks. As I mentioned in the beginning, we entered into a conditional share purchase agreement regarding the acquisition of 100% of the shares in LGT Group on the 16th of July 2021. LGT is a leading full-service provider of transport, logistics, and warehousing solutions, specially tailored to the furniture industry. On slide 12, you see a brief overview of the group that operates from premises in Denmark, Sweden, and Finland. On each location, the group also operates cross-docking and warehousing facilities, which represent the backbone of the LGT service offering to customers. These facilities are business-critical in order to handle non-palleted and lightly wrapped furniture without damaging the goods, which is one of many key strengths that LGT has.
A minor part of the acquisition involve third-party logistics activities in Malmö, Sweden that are not related to the furniture niche, as you see in the bottom right of this slide. LGT handles more than 600,000 furniture consignments annually, and in 2020, the group reported a net revenue of approximately SEK 830 million, which they generated with approximately 320 employees in total. If we move on to page 13, here we have highlighted the main strategic reasons behind the acquisition. First of all, the acquisition represent new product offering within Road & Logistics, as we strengthen our presence within furniture logistics significantly and onboard more than 300 furniture specialists, which is very similar to what we did in the automotive niche with the acquisition of Ebrex back in 2020.
Secondly, the acquisition will increase the scale of our Nordic Road & Logistics organization after closing, both on the procurement side for the NTG as a group. Also in terms of the services we can provide to furniture brands, manufacturers, wholesalers, and retailers. As we, together with LGT, will be able to enhance LGT's one-stop shopping offering by adding NTG's portfolio of cross-European Road & Logistics, and global Air & Ocean solutions. In this way, the acquisition is expected to give rise to network effects across the NTG group by promoting NTG's portfolio of cross-European Road & Logistics, and global Air & Ocean solutions to NTG's customers. Finally, the new niche represents another platform for growth as we see multiple opportunities to strengthen and expand the business to new customers, segments, and also geographies.
On the right-hand side, you see the transaction details, including the enterprise value of SEK 375 million and the conditions to closing. That include the competition approval in Denmark and Sweden. We have already now received the competition approval in Sweden, and we therefore only await the Danish approval before closing can take place. That was all from our side. Moderator, if you'll please open the line for any questions. Thanks.
Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one on your telephone. We have one question from the line of Michael Rasmussen. Please go ahead. Your line is open.
Yeah, thank you very much. It's Michael Rasmussen here from Danske Bank, and excuse if some of my questions are something you've already mentioned. I had a few technical issues along the call here. First of all, can you just discuss a little bit on the assumptions into your guidance for the second half? When I look through this on an organic basis and also including your comments in terms of the state of the market, it does seem a little bit conservative to me. If you can just run through what exactly are you seeing in the second half, and then I'll continue with my other questions afterwards, if that's okay.
Yes, of course. Please remember that we have the DKK 20 million one-off effect, so that comes to that current run rate on first half-year is DKK 218 million on adjusted. We are seeing the gross margin pressure as also you can see in particular on the Road side. We do not see, I fully understand that you are looking for a little bit more, but you also have to remember that LGT is not a part of this outlook. We expect that the activity will be high in the second half-year, but we also expect that we will see the margin pressure maybe also develop a little bit compared to where we were at the end of Q2. A high margin pressure and then a high activity. That is what our assumptions really are based on.
Do you expect the yields to come down on the Air & Ocean side from where they are right now? Do you expect them to stay at the Q2 levels?
I think that we are seeing a little bit more normalization in the air business, and what we hear is that the ocean business will be around the same level, at least for Q3, and then we have to see what happens in Q4.
Fully understood. Okay. My next question here is a little bit on the dynamics in the ocean market. I recall also from after Q2. After Q1 that you spoke about, you've gone a little bit more spot-based in the market, i.e. less one to three months contracts, if I understand that correctly. Can you just explain the dynamics a little bit in that? Is that also part of the explanation for the gross margin pressure? Is it simply that given your size, you can't get any or significant share of one to three months contracts with the carriers and thus you're fully in the spot market, which means that your top line is supported but the GP doesn't go up in the same trends?
I think we are very happy about our GP. Maybe the gross margin is under pressure, I do also think that we see the same movement by our peers. What we are seeing is that we are not able to get more than, let's say, if we get $200 on a container and then it costs $5,000 or it costs $10,000, then the gross margin will of course decline and that is what we are seeing. As we can restate that we are really operating on a spot market today, and it's really hard to get space on board on the carriers. I think that our trend is almost the same as what you see out in the market.
Great. Thank you. Again, sorry if you've already mentioned this on the call. I note that in the report you talked about also price pressure from both capacity constraints, but also some regulatory changes in Denmark when Denmark is the intermediate destination. Can you please explain that to me?
You have the new rules in Denmark where you're not allowed to drive with foreign drivers if you're not paying them the same as a Danish driver. It is really difficult for a haulier from, let's say, Romania or Poland or something, to understand the Danish rules. That means that today we're not allowed to do the domestic in Denmark with our foreign hauliers. That means they will run empty instead of taking a drive. If they're standing in the north of Jutland and have to go back to Germany, then they will not be able to take a load from the north of Jutland to, let's say, south Denmark and then go further on. Therefore, they have to drive empty. That is, of course, pressing our margins.
Fully understood. I don't know if there are any other questions from analysts on the call, or I can continue.
I think you can continue.
I see what you say on LGT. They do a quite decent margin business already now. Can you talk a little bit about the potential for synergies also going forward? To ask this in another way, what was the acquisition price post-synergies, which you typically start to talk about also in part of acquisitions?
I don't think we will discuss that today. We definitely see some synergies. To be honest, that is not a synergy case on employees and so on. It is a synergies where NTG will be able to run some of the lines for NTG. It's not a synergy case in terms of saving a lot of employees and so on, but there will definitely be a lot of cost savings and there will also be, of course, the normal synergies and ferries and so on. We are not in the position where we will come in and tell that at the moment. We will definitely come back on that when we are able to close the deal.
Fully understood the question. Can you just explain what exactly you mean with the incentive structures are to be aligned with NTG's Partnership Model? Is this a new path that you're setting up, or is it something else that you do in terms of bonus programs?
Yeah, we will definitely make some of the key employees to partners, and that means selling some of the shares to them. It will not be a fully owned company when we have acquired it and made a Partnership Model out of this one as well.
Okay, great. How do you feel in terms of management capacity right now? You've done four acquisitions in just recent times here. Will you now take a pause and make sure they're integrated? LGT is also a bit bigger. I think it's the third biggest company you've ever purchased. Will you still be able to buy small or medium-sized companies along these integration impacts, yeah?
I don't think we will stop our acquisitions. We do definitely feel that we have the capacity within our organization. Saga and TB, they were already integrated in Q1. Cargorange is running very on their own, with strong management. Twente is also 100% integrated, already running on our systems. Neptun, they have a very strong management, and they have experienced management and are able to run as a standalone for 20 years, and they will keep on. That was one of the reasons why we acquired Neptun, that they were able to run on that. We also feel that NTG has a very strong management. We have been in very good dialogue with them, and that's also the reason why they will become partners. We definitely feel that we have the management power to do more acquisitions, definitely.
Great. Thank you very much, both of you. I think that was my list of immediate questions right now.
Thank you for your question. We have the next question to the line of Lars Heindorff . Please go ahead. Your line is open.
Yes, morning. Thank you for taking my questions. Some questions to my part as well. First, on the thing you mentioned about the capacity shortage, this is mainly in the Road & Logistics. What is actually having the biggest impact? Is this actually the shortage of capacity, or is it the regulatory environment that changed when we talk about the pressure on the margin?
I think it's combined. I think that in particular, we also have to admit that the hauliers really dislike driving to Denmark because they feel that it's a little difficult operating in Denmark. We definitely also see that the capacity situation is that there's a lot of volume on the market, and therefore, we need a lot of hauliers, and we are simply having a little bit of challenges getting enough capacity from the haulier market.
The reason why I'm asking is I'm a little curious about this because, I know they're bigger, but some of the other competitors in out in the market, they also talk about capacity shortage, but still, they have been reporting rising gross margins, even despite that we've seen actually a deterioration in the mix between what is domestic and what is international. That's why I was struggling a little bit to understand actually the reason for the margin pressure on the gross profit line. Yeah.
There's no doubt about that the capacity all this is different from country to country. No doubt about that Denmark is by far the country where we have the biggest capacity shortage due to the new regulations that we have the problem with, especially the domestic market, is hit big time in Denmark at the moment.
Okay. How much of the road is actually Denmark?
It's both transiting Denmark, and the export out of Denmark, like Christian also said before, the possibility to move export truck in position to take export load out of Denmark is taken away. We don't do these domestic loads anymore. Instead of having a load from Aalborg to Kolding, a couple of hundred euros , something like that, we are now driving empty due to the fact that it's too difficult for our hauliers to find out how to pay the Danish salaries for only this transport. It needs to be shown roadside when they are stopped. The risk is way too big. Better not to do that.
I also have to remember that some of the acquisitions that we have made, they have a low gross margin. You can't just compare one-to-one with our competitors, with TB and Cargorange and have a lower gross margin than the rest of the NTG Group. You have to also see that mix that you have a deterioration in the gross margin due to the acquisitions. They have a very strong EBIT margin also conversion, there's nothing wrong with the companies.
Okay. All right. Fair point. On the acquisition of LGT, I don't know if you can give us a little bit more details about also here now we're talking about gross margins, conversion ratios. You mentioned, Christian, that this is not sort of a such a synergy case, it's more sort of an add-on, if I understand it correctly, to what you already do. Maybe just a few points on some of the numbers there to get a feeling for actually how the structure is in the company?
I'm not 100% sure I understood the question, sorry.
Okay. What are the gross margin and conversion ratios of LGT?
I think we will have to come back to that a little later because there is something with the 2020 and the 2019, which we have already published. The effect, I think we need to come back on that a little later when we are closing the deal. It will be a little premature for us to give that flavor at the current moment. At least you can see what we have got from 2019, then you will have to in 2020, and then we have to also adjust what would come in with what we have of synergies and so on. We'll give a little bit more flavor on that a little bit later, it's a bit too early.
Okay. Last but not least, because I think Christian said, again, this is not something, the acquisition here is not driven by synergies as such and hence cost reductions, but rather it's a sort of a complementary to what you can do, and you can take some of the volumes from the LGT and into some of your lines. If there isn't really that much synergies, what kind of integration period are we looking at here?
It is a little bit different on the production because you have a last mile to also to private customers, and that means that's not been a big focus of our IT. The IT will be a little bit more challenged than what we saw with Cargorange , which was a plug and play or some of the others. We will see an integration period on the IT side, which is a little longer than what we have seen on the previous acquisitions. As I said, they are self-running on everything. Of course, and we should explore all the opportunities on cross sales and also some of the NTG companies being subcontractors for LGT and so on.
Some of the synergies on the sales side, we will be able to harvest faster than some of the synergies on the IT side and so on.
There's no doubt that we see the possibility to grow into a new market, just like we talked about before with Ebrex, with the automotive business. Here we see a big possibility to grow further into the furniture market with this acquisition of LGT.
Okay. All right. Thank you, guys.
Thank you.
Thank you for your question. As a reminder to the participant, if you wish to ask a question, please press star one on your telephone keypad. There are no question. I will hand back over to Mr. Larsen.
Thank you very much for your time, and that was all for now. Thank you.
That concludes the conference for today. Thank you for participating. You may all disconnect.