Earnings Call: Q2 2021

Aug 17, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Nordic Export Group Q2 20 21 Analytics Call. At this time, all participants are in a listen only mode. I will now hand the conference over to your 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 2, we kind of ask you to read the important notice provided in this slide. And then let's move on to page 3. Here you see the presenting team of today. My name is Mikael Arsen and I'm the Group CEO of NGP Nordic Transport Group. And with me today, I have Christian Jacobsen, 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 1st July And an overview of the acquisition of LTG Group announced on the 16th July. At the end of the presentation, the line will be open to questions from the audience. If we move on to page 5, These are the main highlights for the Q2. Overall, the Q2 represents yet another strong quarter with significant Growth in both our divisions. The 2nd quarter was characterized by continuing extraordinary market conditions in air and ocean With no expected near term signs of normalization, especially within the ocean freight and high activity as well as capacity shortage In the Road and Logistics division, the double digit growth and strong financial performance that was realized in Q2 Clearly, it reflects the ability of the organization to adapt to the challenging market conditions. During the Q2, we also announced the acquisition of 20 H Class and Neptune Transport. And after Q2, on 16th Of July, the acquisition of the LTT Group. Finally, we updated our full year outlook on the 1st July 2021, And we maintain the guidance of revenue between DKK6.3 billion and DKK6.7 billion and an adjusted EBIT between CHF450,000,000 and CHF496,000,000. With those words, I'll now hand you over to Christian, who will take you through the financial results. Thank you, Mario. As Mario said, we are very proud of the results in the Q2 and we are very pleased to see that the strong momentum continues The performance in both divisions exceeded our previous expectations. On page 6, you see the main financial highlights for the group, where net revenue in Q2 totaled DKK1.7 billion, up DKK39.4 billion versus Q2 2020. The positive development in organic growth continued with an increase of 31.3%, while effects from Utilities within Road and Logistics contributed 8.1%. Adjusted EBIT increased 146 percent to €138,000,000 in Q2 2021. The increase includes the net positive one off effect of €20,000,000 in the Rodel Logistics division related to the early termination and reassessment of previously impaired lease agreement for an office and logistics facility in Switzerland. Moreover, the increase in adjusted EBIT was driven by organic and attrusive growth in gross profit And an increase in the conversion ratio in both division. The operating margin was 8.0 percent for Q2 2021 and 6.8 percent when adjusted for the one off effect in Switzerland. And then if we move to Page 7, you see the summary Of the key financial performance in KAES, which illustrate that particularly the extraordinary situation in the air and ocean market And capacity constraints in certain group markets leading to a price pressure had a negative effect of on gross margins In Q2 2021 compared to recent previous quarters. However, the reorganizations and restructuring initiatives completed in 2020 An efficiency improvement in both divisions supported a continued upward 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 7% for the Motor and Logistics division compared to 5.4% in Q2 2020 as illustrated with dotted lines in the graphs. Then if we go to Page 8, we see the financial revenue of the Golden Logistics division. The division generated a Net revenue of DKK1.3 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 the prior growth driven by the acquisitions of Segmentals, TB International, Cargo Rent, 20 Express and the June Transport That contributed with 10.3% for the quarter. Total growth for the period was 36%, including FX of 0.5%. Adjusted EBIT increased 140 percent to €113,000,000 Corresponding to an operating margin of 8.5% versus 5.4% in Q2 2020. And as I said, the operating margin was 7.0% if we adjust for the one off items. And then if we flip to Page 9, you The results for the E and O division. The division realized a net revenue of DKK394 1,000,000 for the quarter, which was 52.2% above the same period last year. The organic growth was Driven by higher land ocean rates globally, above based activity increases together representing a growth of 52.3% in existing business. In general, we continue to benefit from the extraordinary and ocean market conditions That continued to redirect volumes to the old market in Q2, 2021 as consumers search and the customers search for competitive prices and security of capacity. A startup in the U. S. Contributed positively The total growth was 7.2%, while the close 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 on as freight rates It increased significantly compared to the same period last year. Adjusted EBIT increased approximately EUR 2,000,000 From Q2 last year to €25,000,000 in the Q2 of 2021 Cost volume to an operating margin of 6.2%. And then 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 minus DKK 136 1,000,000,000 as per June 30, which was higher than last year and related to increased activity during Q2 2021 and Installing circumstances in the Aeronautics division and the benchmark period affected by the COVID-nineteen deferred payment schemes last year. Adjusted free cash flow came to €98,000,000 in the 2nd quarter as illustrated in the middle, which was below same period last year. Finally to the right, you see net interest bearing debt excluding IFRS 16 that decreased to minus kroner186 1,000,000 mainly due to the normalization in net foreign capital partly offset by the acquisition of Neptune and Toyota acquisitions. By the end of the quarter, we had a net cash position of €186,000,000 And on top of that, we had a committed facility of up to €500,000,000 gains for us. And then 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 revenue in the range of DKK6.3 billion to DKK6.7 billion An adjusted EBITDA in the range of DKK 450,000,000 to DKK 490,000,000. The guidance includes the Total net of one off effect of DKK20 1,000,000 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. And then as a concluding remark, Michael will now briefly present our latest Thanks. As I mentioned in the beginning, we entered into a conditional share purchase agreement regarding the Precision of 100 percent of the shares in LTT Group on the 16th July 2021. MTG is a leading full service provider of transport, logistics and warehousing solutions, especially 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 LTT service And these facilities are business critical in order to handle non palleted And likely wrapped furnitures without damaging the goods, which is one of many key strengths that LTT has. A minor part of the acquisition involved 3rd party logistic activities in German Sweden that are not related to the furniture niche As you see in the bottom right of this slide, LTT handles more than 600,000 furniture consignments annually. And in 2020, the group reported a net revenue of approximately SEK830,000,000 which they generated with approximately 320 employees in total. If we then move on to page 13, Here we have highlighted the main strategic reasons behind the acquisition. First of all, the acquisition represents new product offering within growth and logistics, As we strengthen our presence within furniture logistics significantly and onboards more than 300 furniture specialists, Which is very similar to what we did in the automotive niche with the acquisition of EPRIX back in 2020. Secondly, the acquisition will increase the scale of our Nordic growth and logistic organization after closing. Both on the procurement side for the NTG as a group, but also in terms of the services we can provide to furniture brands, Manufacturers, wholesalers and retailers. As we together with LGG will be able to enhance LGG's one stop shop The shopping offering by adding NGG's portfolio of cross European rope and logistics and global air and ocean solutions. In this way, the acquisition is expected to give rise to network effects across the NTG Group. By promoting NGG's portfolio of cross European Road and Logistics and Global Air and Ocean Solutions to NGG's Customers. Finally, the new niche represents an old 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 interest price value of SEK 275,000,000 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. So moderator, Please open the line for any questions. Thanks. Ladies and gentlemen, We now begin the question and answer session. We have one question from the line of Michael Rasmussen. Please go ahead. Your line is open. Thank you very much. It's Michael Rasmussen here from Danske Bank. And excuse if some of my questions if you 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 To 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. So 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 €20,000,000 in one off effect. So that comes to that Current run rate on the first half year is €218,000,000 on adjusted EBIT. And then we are seeing the gross margin pressure as also you can see in particularly on the road side. So we do not see we understand that you are looking for a little bit more. But you also have to remember that NTT is not a part of this outlook. So we expect that The activity will be high in the second half, 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. So a high margin pressure And then the high activity level is what our assumptions were based on. But do you expect the yields to come down on the air and ocean side from where they are right now? Or do you expect it 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 is a little 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 that sorry, after Q1 that you spoke about, You've gone a little bit more spot based in the market, I. E. Less kind of 1 to 3 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 1 to 3 months contracts with the 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 don't I think we are very happy about our GP. Maybe the gross margin is under pressure, but I do also think that we see the same movement by our peers. So what we are seeing is that we are not able to get more than let's say, if we get 200 Dollars on a container and then it costs 5,000 or it costs 10,000 then the gross margin We'll of course decline and that is what we are seeing. And then as we can restate that we are really operating on a spot market today and it's really hard to get space on both on the carriers, but I think that our trend is almost the same as What you see are in the market? Great. Thank you. And again, sorry, if you've already mentioned this in 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. Great. But also some regulatory changes in Denmark when Denmark is the intermediate destination. Can you please explain that to me? Yes. But 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 and it is really difficult for a whole year from let's say Romania Poland or something to understand the issues and that means that today we're not allowed to do the domestic in Denmark with our Foreign orders and that means they will run into instead of taking their drive if they're standing in the north of Japan and Let's go back to Germany, then we will not be able to take a load from north of Jornal to Let's say, South Denmark and then go further on. And therefore, they have to drive entry and that is, of course, pressuring our margins. Fully understood. I don't know if there are any other questions from analysts of the call or I can continue. Okay. So I see what you say on LTC. Maybe you can I mean, they do A quite decent margin business already now? Can you talk a little bit about the potential For synergies also going forward, so to ask this in another way, what was the acquisition price Post C and Ds, which you typically start to talk about also in parts of positions? I don't think we are. We will discuss that today. But we definitely see some synergies. But can you understand it's not a synergy case On employees and so on, it is a synergies where NTT will be able to run some of The lines for AGT, so it's not a synergy case in fact in terms of saving a lot of employees and so on. There will definitely be a lot of cost savings and there will also be of course the normal synergies and ferries and so on. Well, as 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 Fully understood your question. So can you just explain what exactly you mean with the incentive Structures are to be aligned with NTG's partnership model. So is this a new path that you're setting up? Or is it something else that you do in terms of bonus programs? Yes. We will definitely make them some of the key employees to partners and Let me send me some of the shares to them. So 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. So how do you feel in terms of management Capacity right now, I mean, you've done 4 acquisitions in just recent times here. Will you now kind of take a pause and make sure they're integrated? I mean, LGD is also a bit bigger. I think it's the 3rd biggest company you've ever purchased. Or will you still be able to buy kind of small or medium sized companies along these integration I don't think we will stop our acquisitions. Maybe we will We do definitely feel that we have the capacity within our organization. And I mean, SEGA and TB, they were Already integrated in Q1, cargo range is running on their own strong management. 2020 was is also 100% integrated already running on our systems. And Neptune, they have a very strong management and they have Experience management and are able to run as a standalone for 20 years and they will Q1, that was one of the reasons why we acquired Neptune that they were able to run that. And we also feel that BTG has a very strong management. We have been in very good dialogue with them and it's also the reason why they will be may become partners. So 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 from the line of Lars Hintoff. Please go ahead. Your line is open. Yes, good morning. Thank you for taking my questions. Some questions from my part as well. First on the thing you mentioned about the capacity shortage, this is mainly in the roads and logistics. I mean, what is actually having the biggest impact? Is it actually the shortage of capacity? Or is it the regulatory environment That will change when we talk about the pressure on the margin. I think it is combined. I think that and in particular, we also have to admit that the OEMs really It's like driving to Denmark because they feel that it's a little difficult operating in Denmark. And then 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 And we are simply having a little bit of challenges getting enough capacity from the whole market. I'm just the reason I'm asking is I'm not sure about this because I mean, I know this is a big one, but some of the other competitors in the market, they also talk about capacity shortage. But still they have been reporting rising Gross margins, even despite that we have seen actually a deterioration in the mix between what is domestic and what is international. So that's why I was struggling a little bit to understand actually, I mean, the reason for the margin pressure on the gross profit line. But there's no doubt about that the capacity orders is different from country to country. And no doubt about that Denmark is by far the country where we have the biggest capacity shortage due The new regulations that we have the problem with the especially the domestic market that it shifts big time in Denmark at the moment. Okay. How much of you how much of the road is actually is it's Denmark? But it's both Transition in 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. So instead of having a load from all boats to coating a couple of €100 something like that, we are now driving empty due to the fact that It's too difficult for our haulers to find out how to pay the Danish salaries for only this transport and It needs to be shown roadside when they are stopped. So the risk is way too big. It's better not to do that. Well, Lars, you also have to remember that some of the acquisitions that we have made, they have a low gross margin. So you can't just compare 1 to 1 with our competitors TV and cargo rates have a lower gross margin And the rest of the NTT Group, so 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, so there's nothing wrong with the companies. Okay. Fair point. Then on the acquisition of LTT, 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. But 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, sir. Okay. What are the gross margin and conversion ratios of LTT? 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. So 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 given Let's leave at the current moment. But at least you could see what we have got from 2019 and then you will have to And then 2020, we'll have to also adjust what would come in with what we have opportunities and so on. So we'll give a little bit more flavor there a little bit later, It's a bit early. Okay. Okay. And then last but not least, because I think Chris you 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. So if there isn't really that Much synergies, I mean, what kind of integration period are we looking at here? But they it is a little bit different on the production because you have a last mile To also to private customers and that means that that's not been a big focus of our IT. So that The IT will be a little bit more challenged than what we saw with Cargo Range, which was a plug and play or some of the others. So we will see an integration period on the IT side, which is a little longer than what we have seen On the previous acquisitions, well, as I said, they are self running on everything. And then, of course, then we should Exploded all the opportunities on cross sales and also Some of the entity companies being subcontractors for entity and so on and so. So some of the synergies on the sales side, we will We would harvest faster than some of the synergies on the IT side and so on. Also there's no doubt that we see the possibility To grow into a new market just like we talked about before with Aperics with the automotive business here we see A big possibility to grow further into the furniture market with this acquisition of LGT. Okay. Thank you, guys. Thank you for your question. There are no questions. I will hand back over to Mr. Larson. 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.