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

Hello, and welcome to the bpost first quarter 2024 quarterly results. My name is Caroline, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now -- today, we have Chris Peeters, CEO; and Philippe Dartienne, CFO, as our presenters. I will now hand over to your host, Chris Peeters, to begin today's conference. Thank you.

Thank you, and good morning, ladies and gentlemen. Welcome to all of you, and thank you for joining us. I'm pleased to present our first quarter results as CEO of bpost Group. With me, I have Philippe Dartienne, our CFO, as well as Antoine Lebecq from Investor Relations. We posted the materials on our website this morning. We will walk you through the presentation, and we'll then take your questions. [Operator Instructions] Philippe, let's get to the quarterly results, and I will then take the floor for a status update on press distribution in Belgium, as this is one of our key priorities for the moment.

Thank you, Chris, and good morning to all of you. I'm on Page 3. Our underlying performance during the first quarter was impacted by challenging market conditions, particularly with ongoing pressure on our top line in North America and soft market backdrop in Belgium in Europe. However, despite these challenges, we managed to navigate through them and delivered a resilient performance, thanks to notably our domestic and cross-border market and our continued focus on productivity in North America. You see that our group operating income for Q1 stood at EUR 993 million and declined year-over-year by 5.3%, mainly due to ongoing pressure in North America, while on the other hand, our domestic revenue remained flat, despite lower mail revenue, including a EUR 5 million lower state compensation for the press concession. And our fulfillment activities in Europe and our Asian cross-border sales continued to grow. On group adjusted EBIT, that stood at EUR 62.1 million, generating a margin of 6.2%, including a EUR 7.7 million M&A cost tied to the Staci acquisition. Before we delve into the financial performance of our business unit, you will note on Slide 4 that while our adjusted EBIT decreased from EUR 78 million to EUR 62 million year-over-year, our adjusted net profit only slightly decreased from EUR 48 million to EUR 44 million. This is primarily due to a nearly EUR 11 million increase in financial results, which, besides FX impact, is mainly attributed to the absence of interest charge related to the variable U.S. dollar notes that we repaid in December 2023, but also a rise in interest income from cash and cash equivalent investments in the quarter. Let's move now to the details of Belgium on Page 5. At Belgium, we see that the revenue decreased by EUR 9 million to EUR 546 million. Domestic Mail recorded an underlying mail volume decline of minus 6.7% for the quarter against a minus 8.8% in Q1 2023. This impacted negatively the revenue by EUR 21.4 million, yet was mitigated by positive price and mix impact of plus EUR 12.2 million, resulting in a negative EUR 9 million lower domestic revenue year-over-year, of which EUR 5 million coming from the reduced state compensation for the press concession. When it comes to Parcels in Belgium, we recorded an increase of EUR 5 million in revenue or plus 4.2%. Parcels volume increased by plus 2.9% year-over-year against a very high comp and a volume trend of plus 9% in the same quarter last year. Compared to our annual guidance of high single-digit percentage, volume growth is lower. Volume trend in Q1 is mainly explained by a delay in anticipated additional volume from existing customers. It should be also noted that this volume growth occurred on the unfavorable market conditions. In Belgium, inflation continues to increase month after month. Since October, when the lowest level of 0.35% was reached and rose at plus 2.2% in March this year, the highest level observed in the last 8 months. In parallel, customer confidence deteriorated from 0 in December to minus 5% in February and March, reaching its lowest level since August last year, as an unemployment prospect soared and household selling intention continue to edge up. Price/mix stood at plus 1.3% in Q1, mainly driven by price increases. Proximity and convenience retail network revenue decreased by EUR 3 million, with lower banking revenue on one end, offsetting the indexation of the management contract. Operationally, revenue from VAS, value-added services, increased, mainly driven by defined solution and document management contracts. However, this growth was more than offset by the repricing of the state services, which is now accounted within VAS instead of other revenue in previous quarters. Let's move to the P&L of Belgium on Page 6. Our intersegment and other revenue increased this year, as they comprised in 2023 a negative EUR 6.25 million impact for the repricing of the state service, as I explained before. We also see that on that line, the higher intersegment segment revenue from inbound cross-border volumes handled in our domestic market for E-Logistics Eurasia. On the cost side, our adjusted OpEx, including D&A, only slightly increased by EUR 3.6 million or 0.7%, mainly driven by higher salary costs, as our cost per FTE increased by 2% year-over-year following the indexation mechanism you're familiar with. We only had 1 in -- since December. While on the other end, we maintained our FTE flat. Bottom line, our adjusted EBIT slightly decreased by EUR 4 million year-over-year, with domestic and inbound parcels mitigating the impact of lower press revenue and inflation on payroll costs. Moving now to E-Logistics Eurasia on Page 7. Revenue were up EUR 4 million, reflecting again a strong growth at cross-border Asia and at Radial and Active Ants. But let's have a look into more details since we have different trends within the different activities. In E-commerce Logistics, revenue increased by EUR 2.5 million. Remember, we have various -- sorry. Stop, rewind, play again. So I was saying that the revenue increased by EUR 2.5 million, with different trends in the different businesses. So let's start with Radial Europe and Active Ants, where we see an increase of plus 13% year-over-year, a growth which is fueled by onboarding new customers as part of our international expansion effort as well as the upscaling activities targeting existing customers. At Dyna, despite higher volumes in the 2-man delivery network, lower volume across all other business lines, notably DynaFix and DynaSure, with less devices to be repaired, led to a decrease in revenue. When it comes to cross-border, revenue increased by EUR 1.5 million or plus 2%. As reported in the previous quarter, revenue growth mainly reflects on one end the contribution of new customers and a continuous growth of existing customers wins, both resulting in some strong volume from China to Belgium. And on the other hand, the impact of ongoing challenges we are observing in the U.K. market. Let's move to the P&L of Eurasia on Slide 8. While the total operating income increased by plus 2.1%, operating expense, including D&A, remained nearly stable, which is mainly explained by several elements: lower material costs in line with lower volume at Dyna and lower SG&A; stable salary cost with inflationary pressures, offset by lower FTEs; and on the other hand, higher transportation costs, in line with higher volume of activities at cross-border, especially for the volume with destination Belgium. From a profitability standpoint, notably thanks to Asian cross-border volume with destination Belgium, we've been able to reach the high end of our annual guidance with a margin level of 7.5%, which is consistent with the one we already observed in the last quarter of 2023. Moving on now to North America E-Logistics business on Page 9. In line with the previous quarters, our top line in North America continues to be impacted by economic softness, the market overcapacity, leading to a high degree of competition and price pressure as well as the in-sourcing of Amazon, which continue to impact the Landmark U.S. business. I will come back on that one as well. The other operating income logistics decreased by 16% or EUR 55 million at constant exchange rate. This corresponds to a minus 15%, which is in line with the previous quarter, but in stark contrast with the first quarter of last year. During which, the revenue was still -- revenue decrease or revenue pressure was still limited to around 6% and only begun to being felt. At Radial, top line decreased by 19% year-over-year, as the lower sales from existing customers and in year revenue of new customer wins, still very limited in the beginning of the year, cannot compensate the client churn that we have already announced last year. As discussed at our previous quarterly results, and to put our drop in U.S. dollar revenue in perspective, we continue to see volume pressure in the U.S. parcels market with, for instance, FedEx and UPS, respectively referring to difficult demand environment and challenging macro environment during their recent quarterly result presentation. At Landmark U.S., this is now the fifth quarter in a row that we record year-over-year lower revenue due to the Amazon in-sourcing that started end of December -- the end of 2022. Despite general pressure in the market, and excluding the revenue drop from Amazon, the other customers continue to grow. Moving to the P&L on Slide 10. Alongside our total operating income, OpEx and D&A decreased by 14% at constant FX. As we managed to align our resources to lower demand and continue to focus on what we can internally control, i.e., productivity. Variable OpEx evolved in line with revenue development, and we continue to benefit from strong variable labor management and other productivity gains at Radial, where the variable contribution margin, the so called VCM, has increased by 3% compared to last year, and stands at its highest ever level. This percentage increase of 3% translated into a $7 million additional contribution compared to last year. Despite a lower fixed cost coverage capacity, resulting from ongoing top line pressure, our ability to align capacity and resources to demand and focus on productivity gains continue to play a key role in protecting our margin in this lasting challenging market conditions. Moving to the Corporate segment on Page 11. External operating income decreased by EUR 1.5 million year-over-year from lower building sales in line with our annual guidance. The high net OpEx after invoicing of internal costs and depreciation and amortization increased by EUR 7.7 million, mainly resulting from some M&A costs resulting to the Staci acquisition. So the EUR 7.7 million is relating to Staci only. The payroll cost also slightly increased following the impact of one salary indexation. Note that after reporting in a reduction of overhead FTEs for 8 quarters in a row, our overhead this quarter remained stable. Let's move now to the cash flow on Page 12. The main items to be flagged here are the following: cash flow from operating activities before change in working capital, stood at EUR 156 million and slightly increased by EUR 6 million versus last year, with some favorable corporate tax settlement offsetting the lower EBITDA. Change in working cap and provision remained roughly stable at EUR 116 million compared to last year. This mainly reflects, on one end, last year's difference in Q1 2023 of the last quarter 2022 payment of withholding tax on payroll, which was, I already mentioned it, a measure that the Belgium government offered through a corporation to cope with the high inflation. So this resulted in a favorability of EUR 31 million this year. But this has been compensated by the lower state compensation for the press that amounts to minus EUR 35 million. Cash outflow from investing activities amounted to EUR 14 million, with a EUR 43 million lower CapEx, reflecting for -- reflecting the purchase of 2 logistics sites in the U.S. last year. This item constitutes the main valuation on our free cash flow. And the cash flow from financing activities amounted to EUR 34 million, in line with last year. I now hand over for Chris for a handover on the press.

Thank you, Philippe. During the presentation of our annual results in early February, we had shared with you our ambition to finalize negotiation with press editors by the end of March. This would have provided us with clarity to our employees and the required feasibility on the financial impacts, allowing us to introduce the group EBIT guidance for 2024. Due to factors external to bpost, the time line deviated slightly, let me provide you with an update on the press developments of the past 2 months. First, regarding the financial support from the government to the publishers. As announced, at the end of 2023, the annual envelope of EUR 50 million until the end of 2026 was confirmed in the form of a tax credit, in favor of the editors, and the terms and conditions, including the illegibly criteria were confirmed by the government on March 20. This was crucial financial information for publishers to progress in their commercial negotiations. Second, regarding commercial negotiations, progress varies between the northern and southern part of the country and also varies by product. For the negotiations with the Dutch-speaking newspaper publishers in the north of the country, which in terms of volume, represents around 80% of the total newspapers currently distributed by bpost in Belgium, the commercial negotiations have concluded, and we announced last Friday the agreement we reached with publishers. As a result, we will gradually transfer volumes from bpost SA to our subsidiary AMP by 2026. AMP is a subsidiary wholly-owned by bpost Group, and works with subcontracts employing their own workers. As a reminder, AMP has been active since 1885 in the press distribution and is the leading press distributor in Belgium, leveraging its 4 distribution centers across the country to serve over 4,500 retail outlets in Belgium, such as press shops or gas stations. This commercial agreement allows bpost Group secure approximately 75% of the volumes we currently handle in Flanders and avoid a social plan for that part of the country. With the negotiation with the French-speaking newspaper publishers in the southern part of the country, which, in terms of portfolio represents approximately 20% of our newspapers, we have the proposal to gradually transfer to AMP, but did not receive the support from our French-speaking unions. And we were unable to submit a similar offer then to the French-speaking editors. We are currently in discussion with the publishers based on a different operational setup for the press distribution in Wallonia. Year 2, the objective is to secure most of the current volumes, but all options are still possible, including discontinuing distribution via bpost if our offer is not accepted by the publishers. We hope to obtain a decision by the end of May. Finally, regarding negotiations with Belgian periodical publishers, we have made good progress and have presented our new commercial offer to the regulator on April 15. We immediately started presenting this offer to our customers and received some positive feedback so far. Again, our goal is to find a good balance to, on the one hand, offering distribution services of high quality at financial conditions that are acceptable, of course, for bpost, but also for the publishers, despite a substantial decrease in government support to the press sector. We're talking here about EUR 110 million between 2023 and 2025 of decrease and of course, to avoid a social plan at bpost. We have achieved this already for the newspapers in France, which is a great relief. The commercial offer for periodicals is being presented to our customers, and we are making every effort to reach a viable agreement for distribution of newspapers in Wallonia, even though it is still at risk. At this stage, as some of the negotiations are still ongoing, we are not able yet to provide comprehensive details on the overall financial impact or to introduce an EBIT guidance for the group in 2024. We will do so as soon as possible. But as you understand, the time line is not entirely within our control. There may be some comment on the strike in the context of the negotiation for the newspapers in Wallonia, bpost experienced a 4-day strike from April 22 to April 25. This strike affected our sorting and distribution operations for press, mail and parcels, particularly in Brussels and Wallonia. Apart from the impact this will have on service quality and the additional cost associated with clearing the backlog of unprocessed volume during this period, we had to engage with our customers so they could make arrangement to mitigate operational disruptions. Consequently, some volumes were temporary transferred to the competitors. As we only began the April closing process yesterday, we are currently not able to quantify these impacts. We will provide further information on this matter when we return to you with the outcome of the ongoing press negotiation. We're now ready to take your questions. [Operator Instructions] Operator, please open the lines.

[Operator Instructions] We will take the first question from the line Frank Claassen from Degroof Petercam.

Frank Claassen, Degroof Petercam. Two questions, indeed. First of all, on the guidance, I understand that you cannot give the guidance, pending the negotiations. But with the full year numbers, you gave some building blocks for the different divisions, excluding this press distribution impact. Can you -- let's say, are these building blocks still valid? That's my first question. And then secondly, related to that, the CapEx, you indicated EUR 180 million at the start of the year, but the first quarter was only EUR 14 million. Is that pure timing? Or do you think that EUR 180 million may be a bit at the high end?

Okay. So let me start and feel free to jump in. So indeed, when we presented the guidance, in fact, we represented building blocks for the different subsets. And then let me briefly walk through. And of course, as you rightly mentioned it, this did not included any impact of the press concession. So let me come back on what we shared with you back then. So when it comes to Belgium E-Logistics Eurasia, again, excluding the impact of the press, we are more or less in line with what we were expecting. So again, excluding that one, nevertheless, there is an additional element compared to the time -- or the assumption that we made back then at the time when we shared with you the guidance or the building blocks for the guidance, which is, as Chris mentioned it 2 minutes ago, which is the impact of the strike. Impact of the strike is direct and indirect impact, in the sense that, of course, we have not been able to deliver some products, some services to the customers, but also it might have an impact also on customers in the future. When it comes to E-Logistics North America, indeed, we see a decrease of the top line in a context, again, which is extremely demanding. And it's not only us seeing it, our competitors as well are seeing it. So there, I would say, in fact, that if we would have to guide right now, we would rather guide to the lower end of the range that we had announced earlier, if the pressure persists. Also keep in mind that when it comes to the top line development in the U.S., this is a business which is highly dependent of the year-end peak. And no one could anticipate right now what's going to be this year-end peak. I mean we have no reason to be more or less optimistic or negative compared to a similar situation when we announced the first quarter of -- results of any given year. When it comes to corporate, then we have to revise it downwards, which is mostly linked to the M&A costs relating to the Staci acquisition. You understand that, at the time, we were presenting you the guidance, or the building blocks of the guidance. For confidentiality reason, we could not state any amounts relating to that activity. So long story short, we have not dropped our initial guidance. We always put it in a way, which is by bidding laws with some exceptions, some unknown, mostly relating to the press. And I would add the impact -- unquantified impact, the unquantified yet impact of the strike we had -- we experienced some days ago. Second point of the question, which is on the CapEx. Indeed, we guided on EUR 180 million. Typically, the first quarter is very low. Last year, it was a bit higher because we had the acquisition of 2 warehouses in the U.S. But if you go back in history, you will see that the first quarter is typically low. One thing is for sure, is that in that CapEx, there are 2 types of CapEx. There are some maintenance CapEx that we will continue to invest in. We need to keep our delivering -- our engine being able to deliver the parcels domain, we continue that one. But there is also a component, which is linked to growth. Since when we are onboarding new customers, we have to invest in IT or sometimes physical equipment. And as in some part of the world, the acquisition rhythm of some customers is slowing down. De facto, there will be less CapEx spent on the development part.

We will take the next question from the line, Marco Limite from Barclays.