bpost NV/SA (BPOST) Earnings Call Transcript & Summary

With me, I have Philippe Dartienne, our CEO at interim; and Koen Aelterman, our CFO at interim. They will provide an update on our internal compliance reviews. Please keep your lines on mute during the first part of the call, and then you will have the opportunity to ask questions after the presentation. So I will now hand over to Philippe to start today's call.

Thank you, Antoine, and good morning, ladies and gentlemen. Welcome to all of you, and thank you for joining us. As you are well aware, we have been quite busy in the recent months with our internal company reviews related to the services provided to the Belgium state. As a reminder, the service under consideration relates to the management of the traffic fines, the 679 bank accounts and the license plates. We have finalized last week, all our compliance reviews and have also completed in-depth legal and financial assessment of their remuneration. The final report has been submitted to the excellent council of the relevant public services. We assume you had a chance to read our press release issued last Friday after the market closed. We will walk you through the key highlights, but most importantly, we want to give you the opportunity to ask us the question when show effective communication on these matters. I will now go through the findings of the 3 audit reports and Koen will then provide more detail on the financial consideration. Let's now start with the traffic fines. On behalf of the Federal Public Services, or FPS Justice, bpost has been managing the administrative and financial processes that execute the processing of traffic fine since 2006. Initially, these services covered national fine, and it was later expanded to include international fine starting in 2015. Besides being responsible for issuing fines, bpost also operate a BPO or business process outsourcing provider, offering various services such as amongst others, a call center, a back office support or the management of IT platform and its ongoing development. Now what did the investigation review? The compensation received by bpost may, in part, constitute unlawful State aid. The traffic fine services were defined in successive management contracts, but their compensation was outlined in separate agreements and was not covered by decision relating -- regarding -- sorry, regarding State Aid that qualified the remuneration under the management contract as compatible. The investigation also found that several other services were included in the management contract and it's deepening agreement, but these services are totally distinct from the services related to the traffic fine collection. Most of these services are actually related to the maintenance of the ICT platform and the recruitment of consultants. And finally, it also appears that bpost made an error in building the rent of the back office space and did not communicate this error to its client when it was discovered. This compliance report has been shared with the external advisers of FPS Justice. In terms of next step, we will now discuss the filing with them and determine how to address this situation. If any overcompensation is identified, bpost will naturally reimburse the excess amount. And we will also discuss how to handle compensation until the new tender is awarded. Additionally, we will take the initiative to clearly define the nature and scope of the services to prevent this revenue from State aid from being used to fund other unrelated activities. This concludes our finding on this first case. Let's now move on, on the 679 bank accounts. So this 679, this is a historical service dating back to 1912 when bpost was a state institution. Bpost manages the bank account of the state and more than 200 public institutions, including tasks such as VAT payments. The FPS Finance entrusted the services to bpost through contracts with the state without ever initiating tender procedures. In the meantime, the government has initiated a tender process that is currently ongoing and we are 1 of the 3 candidates. In terms of findings, here as well, the compensation received by bpost could potentially be considered as illegal State aid. This matter will also require clarification with the relevant administration. Compensation for this service has decreased since 2012. And it's noteworthy that no compensation was provided prior to 1992. Over time, different mechanisms were implemented. An interest and compensation mechanism was initially outlined in the management contract being then replaced by a transaction-based fee in 2010, and it subsequently involved towards a fixed annual fee mechanism since 2018. Additionally, the compliance review uncovered that at one point some bpost employees submitted a cost presentation for the 679 service to the FPS Finance without involving or consulting the bpost legal and financial teams. This presentation was found to be inaccurate and has been provided to FPS Finance to support compensation negotiation for the service expansion. The complete report has been shared with the external advisers of FPS Finance. In terms of next steps, bpost will discuss these findings with them and take further action to rectify the situation. Bpost will, of course, reimburse any overcharge amount. Additionally, the existing compensation will be reviewed for the period until the new tender is awarded. Let's now move to the third and last case, the license plate file. Bpost is in charge of the production and the delivery of license plate and registration certificates for new and used vehicles in Belgium as well as the cancellation of license plate and the collection of fees for these services. The consortium bpost/speos being a bpost subsidiary, won the contract for these services in 2 consecutive tenders launched in 2010 and 2019 by the Vehicle Registration Department of the Ministry of Mobility. The audit confirmed that bpost did act correctly in both standard processes where the concession was awarded. However, during the provision of services, bpost did not meet the service level agreement on multiple occasions, which should contractually result in fines. This fine has not been paid yet, but will now be settled. This report has also been shared with the external advisers in this case of FPS Mobility. Bpost Group will discuss this finding with them and take further action to review the concession terms, including compensation. These are the key findings we have uncovered and we deeply regret the way these cases were handled in the past. It's particularly painful that the action of a small number of individuals have damaged the trust of our customers, employees and shareholders. I would like to emphasize, however, that this involves a limited number of employees and we have taken actions. Throughout these 3 investigations and the one related to the press concession, 14 bpost employees at various levels were identified. These individuals who [indiscernible] participated were aware or failed to properly identified and prevent [indiscernible]. In collaboration with external experts, their involvement and knowledge were analyzed in details and HR decisions were made based on this analysis. During the audit, collaboration was terminated with 8 individuals. We also found that some other individuals involved had already left the company before the investigations. So we have taken the necessary measures throughout the investigation. It's good that we can gradually conclude this matter and find solutions in collaboration with the various ministries. And of course, we will bear all the consequences. We will take full responsibility, and we will also work towards building a stronger organization for the future. To achieve this, we are firmly committed to increase awareness and application of regulations across the group. We will continue to invest in building a culture of proper corporate governance. And in fact, we are already doing so. The code of conduct has been translated into 10 languages and distributed to all 36,000 employees of the group through various means. They are mandatory compliance and competition training session for various management and sales team within the business units and branches. Every bpost employee is required to complete an online training on regulation and all its aspects by the end of this year. A new reporting system has been set up, easily accessible to everyone and closely monitored with training provided on its use. The compliance and legal teams will be strengthened with 6 additional staff members allowing them to be more proactively involved in decision-making throughout the organization. This way, the culture of campaigns will be deeply embedded in the company. I would like now to hand over to Koen for the financial consideration. Koen, floor is yours.

Thank you, Philippe. Good morning, everyone. In addition to our internal compliance reviews, we have completed in collaboration with independent economists and legal experts, the first phase of our assessment regarding the compensations paid by the Belgian state for the 3 services in question. So note that the following does not include the press concession case. We are now entering the next phase, which involves the resolution efforts with the relevant ministries. The time line for the subsequent steps will depend on their level of engagement. While awaiting the full resolution of these matters, however, the current status of the assessment conducted by bpost Group leads to the following financial considerations. In line with our commitment to reimburse any overcompensation, we are booking today a provision of EUR 75 million. Based on our in-depth legal and economic evaluation, we estimate that this amount represents the reimbursement of overcompensations paid by the Belgian state over the past years for the 3 contracts. This number remains preliminary as it does not yet reflect the views of the Belgian state. Regarding the annualized negative EBIT impact in 2023 of repricing the services to the 3 ministries, the annual provision has been reduced to EUR 10 million based on our analysis. This replaces the accrual made further to the preliminary estimates as initially communicated back in April. This figure also remains preliminary as it does not yet reflect the views of the Belgian state. The final repricing impact could be substantially higher, depending on the position taken by the state. As always, we commit to continue to provide updates regarding the resolution of these cases and the related financial impacts in accordance with applicable regulation. We are ready to take your questions. Please use the raise your hand option indicated by hand icon and we'll give you the word one by one.

Okay. So I think Nikhil, you're the first in the queue, please go ahead.

Thank you for the update. First, on the EBIT impact. I just want to maybe reconfirm that the original EUR 25 million to EUR 50 million guidance that you mentioned in the first quarter of the year, I assume this did not include any impact from the press concession given that the contract is still running. If you could just confirm this? And maybe, yes, just confirm that this is actually given outlook upgrade from EUR 25 million to EUR 50 million to just EUR 10 million. And then, of course, adding the EUR 75 million provision. Is this how we should look at it? And why you have not officially changed your outlook? That would be my first question. And the second question would be on the 3 services and so the fines, the management of the accounts and the license plates. Can you give a bit of an overview of -- yes, I think for the fines, it's quite obvious, it's in the management contract, so that's still running. But for the management of the accounts, when you expect the tender to be completed. And also for the licensing plates, when is the new tender coming up on that front? And also, how certain are you that you can renew these contracts or will the government allow bpost to participate to? These would be my 2 questions, please.

All right. Let me take the first one. So indeed, I confirm that the EUR 25 million to EUR 50 million was for the 3 contracts in scope, which were discussed on today. So indeed, that provision or that estimate has been replaced with the provision we take now, which is the EUR 10 million on an annual basis. I'm not sure I got the question on why change the outlook, but we can come back to an outlook as part of our Q3 results, which we'll share with you early November.

So coming on the question of the 3 contracts. So some of them, they will be -- there are new tenders ongoing, typically on the 679. We are due to submit our bid mid-November, if I'm not mistaken. And as I said, we are not the only one, they have 2 other financial institutions who are interested in submitting an [ AFRA ]. I don't recall by hard when is the due date for the license one, if my colleagues could look it somewhere, but I don't find it. I think it's in next 2 or 3 years. If there is still another 2 or 3 years to go. I'm quite sure I'm not more precisely than that. But more generally, what I would say is that even with the preliminary disclosure that we made in April, we had first contact with the Belgium state and as I said it at that time, I also repeat that one when we commented on the Q2 results, the quality of the service rendered by bpost is not in question at all. These services are of great quality. They are absolutely essential for the ministries to be able to carry out their mission and it's not the issue. The issue is as it has been said, on potential overcompensation, but not on the quality of the service itself. Of course, in the new tenders, it's the best will be -- will win. This being said, we are confident that we will be able to submit competitive offers because we have the knowledge to carry out these services since years and years and years. And then it will be, I would say, a typical tender process to be followed.

I think as part of the question you also asked, is there a risk of being excluded. So we have not seen that in any way in none of the ongoing tenders with the government. So we see that as a very remote possibility. In terms of the exact end dates of the contracts for 679, so I said the tender is ongoing, the contract ends in 2024 but with the possibility for a 1-year extension, which we would assume will be necessary as a sort of transition measure. For ELP, the contract runs until mid-2024, but there is no tender launch yet, and there is a possibility to extend with 1 year. Again, given the time line and the new tender has been launched, that might be -- that possibility may be used. And then for traffic fines, yes, the end date is December 2026, with the possibility for the state to organize a tender potentially earlier, but which is not defined at this moment in time.

Okay. So Marco, I think you are the second one in the queue. Please go ahead.

Could you -- do you have actually an idea what's the timing here for the government to take a final decision. And so we have final figures, and we can all move on. That's the first question. And the second question, if you're actually able to disclose what's the absolute EBIT amount coming from these contracts. Just for us to have an idea of what could be a worst-case scenario just in case. You are not allowed to the awarding of these contracts once the current contract has expired.

So there are 2 questions. Just as a clarification, if you are not allowed to be awarded a contract, as Koen mentioned it, there is not that notion of being excluded for this contract. If they -- when they will be a tender, maybe we will win, maybe we will not win. But there is no way the contract for us not be allowed to bid at least as what we heard so far from the different ministries. By the way, they could have already taken very drastic measures by stopping all these contracts, which is also something that they have not done. And once again, I think, due to the fact that the quality of the services is not challenged. When it comes to the -- your first question, Marco, the timing, I'm very sorry, but it's a very difficult question to answer. But let me also be -- clarify a little bit. So in fact, the resolution process will be in 2 step 1. First, we need to come to an agreement with Belgium, the 3 different ministries. And then because we speak about State aid, this file will have to be brought by the Belgium state to the European Commission, who will also carried out its own analysis and come to its own confusion. So you imagine it's not a question of week. It's a question of months not to say years. This being said, it's also true that we will have a clear view when we will have reached the end of the first step, which is a discretion with the 3 ministries. Also, as we mentioned it on Friday, the press release, we are at the full disposal of the 3 ministries, but we are not the one setting the timing and the rhythm for this negotiation. The Board is in their [ hands ] now. They have been ended over the reports last Friday night. They will take time to analyze them before coming back to us with questions, and then we will have extensive discussion. So sorry to be a little bit long, but it's important to understand and not to mislead people by believing that it could be a question of weeks, we all wish it would be. But I think, I don't see anything coming on, certainly not for the end of December 2023.

And then the second part on what is the absolute EBIT linked to these contracts. So we do not share exact margins or EBIT on specific contracts. But I think based on the information we have provided in the past, you have enough to get to a first estimate if you would want to model such a case, again, reflecting the comment which Philippe made on our ability to participate to and bring the quality offer for these standards.

Thank you. [ Paul ], you are the next one. Please go ahead.

Paul from Bank of America. Two for me, one little bit mechanical. So the EUR 75 million provision in the announcement, will that be taken in Q3 or Q4? And will that be taken as a lump sum? And then my second question, how far have the contracts been investigated? I see some of them go back quite a bit. So was there a fixed time line for the investigation or any sort?

Yes, sure. So indeed, so the EUR 75 million will be booked in Q3 as a one-off, so a lump sum. The cash out, of course, will depend on when we reach an agreement with the Belgian state. There may be intermediate steps in that as well. So that timing is not clear, but we will at the very least book the provision for that. As far as the look-back period, so the maximum look-back period for these type of contracts is 10 years. And so we have looked back over that maximum look-back period. Obviously, depending on the different contracts that may have been 10 years that may be something else, depending on how long we've been doing this service. But if relevant, if look back to the maximum period, which can be looked back.

Thank you. Nikolas, you are the next one. Please go ahead.

Nikolas from Kepler Cheuvreux. Two or 3 if I may. So firstly, the numbers involved now. They seem -- they feel relatively low compared to, let's say, what happened to your shares on the one hand, but also compared to what you originally estimated the EUR 25 million to EUR 50 million. So can you help us understand why the outcome has been less than what might have been originally expected? So that's the first question. The second one. So do you have any indication how reliable sort of the results of these finalized internal report is, for example, there has been -- you cited [indiscernible] as a source of some of the slides. Sort of what is the track record on their part in similar projects handled, perhaps some indication there? And then the third one, is there a chance for clawbacks from current or former employees regarding the damages?

Let me take the last 2 ones, and Koen will take the first one. So when it comes to clawbacks with employees, when it comes to individual matters, we typically do not communicate on this kind of arrangement that might have been taken with employees. When it comes to the reliability of the reports, I think we have been helped and supported by a very competent firms, law firms, forensic firms throughout the audit. We initially started investigation with 2 law firms. Then we added a third one to have another angle and view and also the latter being in charge, not of the investigation of the fine, but the defense strategy. When it comes to [indiscernible], I don't know where the name has been picked up, it's true that [indiscernible] is helping us on the resolution of the case but it's more as a project management type of support than content -- pure technical, financial, legal or economical content. Sorry, I also forgot I spoke about advisers. We also use the services of economical advisers who provided us with economical studies which are, as you know, the basis to assess this type of compensation.

Coming then to the first part of the question as to why that difference? There's multiple elements. And I think we had it in our disclosure notes last time as to the complexity of these files and what rise in the end the compensation, but there's numerous elements. There's which legal framework applies, which is not the same for all of the contracts. There's what would be the reasonable margins for market prices for these type of services, which is a benchmarking exercise, which was not done yet at the time we released the previous EUR 25 million to EUR 50 million estimate. There is what type of costs direct, indirect and so on need to be taken in scope to determine then to what to apply those margins to arrive at the compensation. So all of those elements, they were very preliminary when we shared the EUR 25 million to EUR 50 million. We have advanced on all of these in our analysis, hence, that resizing. In terms still of just how reliable it is, I do want to make clear that this is -- this represents bpost view based on that in-depth legal and economic analysis, which has been done with a very high standard of quality. But it's clear that it's our view and if we'll not be surprised that should the state take a different view, they will likely end up at a higher number in their view, which will mean at the end of the day, there is still a [ definitive ] level of uncertainty around these figures, and so they may still change. And as I said, we'll go through the process of the different steps. And so if we have updates along the way, we will obviously share them with all of you.

Thank you. Henk, you're the next one in the queue. Please go ahead.

A couple of questions from my side. First of all, yes, a more legal question or definition question rather. You speak of fines, you speak of overcompensation, you speak of repayments. And the EUR 75 million, if I -- am I correct to assume that this is a repayment of overcharged fees? And what -- if so, what is the risk that this is seen as State aid because that's a discussion that will definitely come up when any proposal whatsoever will be put forward to the EC. So that's my first question. The second question relates to the earlier guidance you gave, the EUR 25 million to EUR 50 million. You've taken provisions of EUR [ 6.25 ] million, I believe, per quarter, okay, in the first quarter and in the second quarter, you basically made an adjustment there. Now the final damage is roughly EUR 10 million to this year's EBIT. How is it going to be treated? Will there be a release from the earlier EUR 12.5 million. I believe I had a third question as well, yes. The press distribution contract, is there any indication as to when that could be completed? Those were my questions.

Thanks, Henk. On the first one, let me be very clear. Indeed, this is considered State aid. If it was not, there would not be any question on margin levels which we have had in the past, so it's the State aid. And so it does consist of a repayment of the overcharged amount. To be clear, and just for the avoidance of any doubt, it's customary in these cases, given that it reflects too high revenue of the past on which corporate income taxes were paid, that those corporate income taxes are deducted of the amount of repayment. So the EUR 75 million is already a net amount taking into account the taxes we have paid too much in the past on that compensation, which does mean, again, for the avoidance of doubt, it is in the footnote of the press release that the amount is not tax deductible, again, of course, in the year you book it. I just want to make sure we're clear on that. In terms of the provisions, so indeed, we were booking EUR 6.25 million a quarter, which means that what we booked up until Q2 already exceeded the annual amount which we would have in mind now. So we will release the difference between what we have booked and the EUR 7.5 million, also 3/4 of the annual amount at which we would need to be by the end of Q3. And then on the press concession, so here, the tender process is ongoing. We have no indications exactly on when the state will attribute, but I think I said last time, given that the current contract ends, normally on December of this year, we do expect an attribution before the end of the year, which will then lead, if not awarded to bpost into a transition period for another 6 months while the new operator -- potential new operator prepares to launch the concession. If we bpost wins, it means we start straight away in the new contract as of the 1st of January 2024.

If you allow me just to add one thing on the last element, you must -- you may have read in the press that the government had said that they wanted to conduct an audit on the current press concession. They are -- we also read in the press that someone has been wanted the contract to review it. But so far, we have not received any question yet on that one. And the government make it clear that a potential award to bpost would be conditional to the outcome of that audit. So there is also that element of uncertainty as we speak.

Sorry to be so persistent, coming back to the first question I had on the State aid there on the reimbursement of the overpayment. Is there a risk that a fine from the EC -- from the European Commission could come on top of that?

No.

No.

So it's simply the repayment and that basically clears the bill.

Absolutely.

Absolutely. Yes, [ press interest ] as you -- Antoine, already mentioned, that interest are already included in the amount we are showing exactly now. [indiscernible], please go ahead.

I missed part of the call. So as -- the question may have already been asked. But my question is on the dividend. So the EUR 75 million provision will lower your net profit, but you do see it as a sort of one-off. Could it impact your dividend policy? Or is it excluded from the base -- the dividend base, let's say, how do you look at it?

Yes. So first, to be clear, the EUR 10 million, so the impact in 2023, this is part of the normal course of business. So it will impact the group results and the dividend. For the provision, it's a very valid question. And there's a few elements here. So first, we have not changed in any way our dividend policy following the announcements we made in April. The dividend will depend on the performance of the full year, which is far from over, and we still have the year-end peak ahead. We have just provided you some insight into the investigation, but we're still -- the following phase is just beginning. And so it's too early to know exactly what the final impact in the year might be and the consequences it would have on the dividend. And finally, everything which is dividend is a matter which is up to the Board's decision to make a proposal to the general assembly. And so only once we have the full year results and the full view of the unknown elements still at this stage, can the company decide on what to propose to the general assembly, where we obviously will continue to strive for a right balance for attractive returns from a dividend perspective, maintaining the financial stability and supporting the further growth of the company. So we will decide -- basically, the message is we will decide when we have the full view of the annual results. Note that in terms of dividend distribution capacity, even should the results of the group be impacted this year, our retained earnings are at a sufficiently high level to continue to pay dividend without any issue.

Nikhil, I see you're still in the queue.

I have very -- 2 very small follow-up questions. First on the provision. Could you share with us the split between the repayments and the interest component that you assumed? And secondly, on that EUR 10 million EBIT impact. Does that already include your costs for all your legal and economic investigations? Is that included in that? Or will there be a separate impact? That would be my questions.

So on the first one, the bulk of it is the repayment. The interest is -- and I need to check the exact number, which is somewhere less than EUR 10 million of that amount. For the EUR 10 million EBIT impact, this is only the repricing effect. It does not take into account the fees we pay to our external advisers. But those have already been part of our results, which you've seen up until now, up until Q2. And you will see, of course, that continuing Q3 and Q4 in all likelihood.

Marc, just appeared in the queue. Please go ahead.

Very quick one. So the -- just to confirm, as that was my question as well. What extra cost can we expect? So there's a minimal of cost in the second half than to be expected from the investigation. Is that correct? Is that correct to take from the last answer?

So I will not pronounce myself on the exact amount of it, but it has already been in the results in Q1 and Q2 with a team of, I would say, similar staffing as what we have around today. And there is the expectation for this indeed to continue at the very least through Q3 where we've had these people working and the expectation, given that we now enter the phase of discussions with the different industries is that throughout that phase, we will also require support from those external advisers. So the message is, it will continue on the same trend as you have seen already so far in the results.

For next year, this will all drop out, of course, so it could be good to have a bit of a number, maybe at Q3 in...

There for next year as well, it will depend on the speed of the resolution as well as then following that, the discussions with European Commission. So it is -- that's a bit too preliminary to say that these will...

But I think it's a fair question. And when we will be providing -- sharing with you the full year result, we might give you an indication of what was considered for 2023 and potentially an idea for what we think it could be for 2024. But in all likelihood, it will be lower in '24 than it was in '23. Because all that forensic investigation is behind us, it's more like -- in fact, the driver will be at which speed that will be able to come to a resolution with the different ministries.

Yes, sure. No, that's very helpful. And then a final one, I didn't get that in the call, but can you remind us on the expiration of the contracts of the 3 ones that we discussed today. I think the traffic fines was end of '26, but the other ones I didn't get.

ELP, it's 31st of July 2024, and 679 is at the end of 2024.

Both with the ability to be extended by one year.

Sorry, the first one was April '24, that was on the license.

No. July '24 is license plate, traffic fine 2026 and 679 is the end of December '24. One thing on that one, it wasn't one number for -- I mean we have not received any comments from the Belgium authority, the different ministries on the quality of the service. So I would not -- it's not our view that because of that, we have lost first all ability to submit a new bid for the new tenders and on the probability of not winning. So we must be very clear on that one.

Thank you very much.

Thank you very much. As there is no further questions, we will now end the call. We would like to thank everyone for being with us and for your patience over the past months. As mentioned, our contacts with the various administration are now our top priority. We will rely on our ability to work together constructively to find solution. When all of this has been resolved, we can turn the page and look to the future without reservation. We firmly believe that we will overcome this challenging chapter. Bpost Group stands for resilience and ambition. Together with our dedicated employees, we are working tirelessly to regain the trust of all our stakeholders and secure the future of our companies. I'm proud that our thousands of employees continue to give their best day after day, even during this difficult period. And as demonstrated in the first semester, we are achieving operationally solid results. We can handle this, and we will emerge stronger. Have a nice day. Bye-bye.