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

Welcome to the bpost Second Quarter 2024 Analyst Call. [Operator Instructions] I will now hand over the call to your host Mr. Chris Peeters, the CEO.

Thank you. And good morning, ladies and gentlemen. Welcome to all of you and thank you for joining us, and please present our second 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 will then take your questions, as always 2 questions each. I would assure everyone gets the chance to be addressed at the upcoming hour. Before we start as anticipated when we last spoke in early July, I am pleased to confirm that we successfully closed the acquisition of Staci yesterday. Thanks to the excellent work and collaboration for our teams from both sites we have completed this acquisition 2 months ahead of schedule and now we can begin implementing the integration plan we have prepared over the past 2 months. I am delighted to welcome Staci CEO Thomas Mortier and his teams to the bpost Group family. As we explained in April, when we announced this acquisition, we will now organize ourselves around 3 business units with the business-based approach rather than a country based one alongside and last-mile and cross-border divisions. Thomas will join our executive committee and lead our 3PL third party logistics activities in Europe, including Staci but also radio and active ads. Our executive leadership is now complete and fully equipped to drive for transformation forwards. Now regarding the quarter results as you can see the highlights of the industry or group operating income for Q2 stood at EUR 988 million and declined year-over-year by 3.8% mainly due to on-going brushes in North America, while on the other hand Belgium remained resilient with stable mail revenue and higher parcel revenues and our e-fulfillment activities in Europe and or European cross border sales continued to grow. Our group adjusted EBIT stood at EUR 57.8 million with a margin of 5.8 percent, a decline of EUR 10.9 million compared to last year, mainly attributable to North America. This decline occurred despite our relentless effort of management about this which can help mitigate some of these pressures. Overall, this set of result a strongly in line with the recent guidance we shared with you in early July. We will now give you more details on the financial performance of our business units.

Thank you, Christiaan and good morning to all. On Page 4, you can find an overview of the key financials for the quarter in both reported and adjusted. Chris has already mentioned, our group top line adjusted EBIT of EUR 58 million. Please note that our reported EBIT amounted to EUR 48 million, which reflects notably the adjustment of EUR 7 million for M&A cost incurred in the quarter. As a reminder, we had nearly EUR 8 million M&A cost in the first quarter. This resulted in a year-to-date EBIT of EUR 127.5 million, while our EBIT stands, reported EBIT stands at EUR 107 million including EUR 15 million of M&A cost. In the second quarter, our adjusted EBIT decreased by EUR 11 million, our adjusted net profit increased by EUR 6 million to EUR 39 million. The EBIT decline was partially mitigated by nearly EUR 9 million improvement in financial results primary due to a positive non cash IAS 19 effect triggered by higher discount rates. Let's move now to the details of Belgium on Page 5. At Belgium, we see that revenue remains nearly stable at EUR 545 million. Domestic mail recorded an underlying over EBIT decline of only 2.9% for the quarter compared to a negative 8.3% in the same quarter of 2023. As anticipated in our annual guidance, this limited volume decline in the quarters includes mail volume from the European Federal and regional elections early June. The mail volume decline impact is created by minus EUR 9 million. This was fully offset by a plus EUR 9 million. Volume minus 9, price plus 9 in this quarter. This resulted in a stable domestic revenue year-on-year, including an approximately EUR 3 million reduction of state compensation for press concession and around EUR 4 million from election mail campaigns. Parcels Belgium recorded in second quarter, an increase of EUR 6.4 million or plus 5.4%. Parcel volume increased by 2.5% year-over-year, while additional volume from existing customers that were delayed in Q1 finally materialized in the second quarter. The volume growth remained modest due to the impact of the 4 days strike in April. During the press negotiation we believe some volume shifted the competition during the strike, resulting in an estimated net volume loss that was a 2% shortfall in volume growth for the quarter. Additionally, due to weather conditions, we observed a very weak momentum in parcel volume in May and June. Combined to the plus 2.9% in Q1, which represents a volume growth of 2.7% for the first 6 months, which not a big one with the revision of our annual guidance a few weeks ago from a high single digit percentage growth to a mid-single digit percentage growth. Additionally, note that this volume growth occurred under unfavorable market condition in Belgium. Indeed inflation has continued to increase months after months since October rising to 3.7% in June from 3.2% in March. This is the highest level observed in the past 10 months, up from 0.35% in October 2022. Additionally, the consumer confidence index continues to progressively deteriorate from 0 in December to -7 in May reaching its lowest since August last year. And after temporary relief in June, the situation worsened again in July as the customer remains pessimistic about their personal financial situation and the macro economic outlook for Belgium, while unemployment prospects soared. Price mix grew 2.9% in Q2, mainly driven by price indices. Proximity and convenient retail network revenue decreased by a bit less than EUR 7 million with a lower banking revenue offsetting the indexation of the management contract. Operationally, revenue from value added services increased, mainly driven by file solution and document management. However, the scores was more than offset by the re-pricing of sales service, which is now accounted within the value-adding services instead of other registry as in the previous year. Let's move to the P&L of Belgium on page 6. Our intersegment and other revenue increased this year as they comprise a negative EUR 6.2 million impact further re-pricing of the state service in the second quarter of 2023, as explained, as already observed in Q1. We also see on that line the higher inter-segment revenue from inbound cross border volumes handled in the domestic network from E-Logistics Eurasia. On the cost side, I will address OpEx including D&A on the slightly increased by 6.3 million or plus 1.3%, mainly driven by higher salary cost as our cost per FTE increased by 2.7% year-over-year, following of 2 salary indexation in December 2023 and in June 2024. While the FTEs remain stable and to also the extent higher recoverable VAT this year. Bottom line, our adjusted EBIT remains stable year-over-year this by a negative EUR 2.6 million impact linked with the strikes in April. Moving to E-Logistics Eurasia on Page 7. Revenue were up EUR 7 million reflecting again the growth momentum of Radial and Active Ants, as well as cross-border revenue development. In E-commerce Logistics revenue decreased by EUR 3.4 million reflecting various businesses with different trajectories. Radial Europe and Active Ants were up 12% year-on-year, continuing the trend of previous quarters. This growth was fueled by customer onboarding as part of our international expansion effort in upselling activities targeting existing customers. At Dyna, despite the higher volume in our 2-man delivery network, lower volumes at DynaFix and DynaSure with few services, few devices to be repaired and insured led to a net decline in revenue. Cross-border revenue increased by EUR 36 million or plus 4% as reported in previous quarter, this growth supported by first volume growth from China to Belgium, and second contribution from new customers and recent wins in European leagues. On the other hand, ongoing challenging condition in the U.K. and a decrease in Asian cross-border volume to destination other than Belgium weighted on top-line development. Let's move to the [ operation ] of Asia on Slide 8. While the operation decreased by 3.3% operating expenses include G&A rose by 2.6% or EUR 4 million. This is mainly due to lower material costs, reflecting lower volume at Dyna and lower SG&A. Offset by higher transportation cost in line with higher activity and favorable mix at cross-border for the volume destination Belgium and higher salaries due to the international activity ramp-up inflationary pressures partially mitigated by productivity gains. From the profitability standpoint, EBIT margin improve year-over-year from 5.5% to 6.2%, notably thanks to Asia cross-border volume with destination Belgium. Moving to our North America logistics business on Page 9. In line with the previous quarter, our top line North America remains under pressure. The operating income of e-commerce logistics decreased by 16% or EUR 48 million. A constant exchange rate is corresponding to a decrease as a bit less than 16%, mainly driven by Radial , but also, Landmark Global. At Radial top-line decreased by 18% year-over-year as lower sales from existing customers and the in-year contribution wins cannot compensate the client churn we announced last year. As you would recall, as we can see from the chart on the right side, illustrating the evolution of domestic parcel in the U.S., Radial's revenue development last year was in line with the volume pressure reported by UPS and FedEx. This was a reflection of economic softness and market over capacity, resulting in high competition in pricing per share for Radial and Speos. More recently, while we observed a slowdown in decline of domestic volumes, which is a slight increase in volume for UPS in the last quarter, Radial rates continued to decrease by 18% in contrast to these volume trends. When examining the drivers of this 18% decline, we see that the same-store sale for the sales that I informed like-for-like business aligned with market trend reported by FedEx and UPS and the majority of the decline actually stemmed from last year's churn, which we had not been able to offset yet with new customer contribution and the rebuilding of our customer portfolio due to persisting challenging market condition hindering recovery. At Landmark this is now the 6th quarter in a row that we record a year-over-year lower revenue due to Amazon insourcing that started end of 2022. As a result, the exposure to Amazon is now significantly reduced going forward. Moving to the P&L on Slide 10. Alongside our total operating income, OpEx and D&A increased by just on the 13 % at constant exchange rate. As we manage to align our resource with lower amount and continued focus on what would could control high productivity. We know that OpEx decreased its quarter that was slightly lower pace the top line due to a belted position amounting to EUR 3.3 million. Besides that, valuable OpEx evolved in line with redevelopment. And we continue to benefit from improvement in valuable labor management and productivity at Radial. We are the Valuable Contribution Margin i.e. VCM, improved once again. Compared to last year, our VCM increased by more than 4% year-over-year and stands at its highest level in Q2, delivering an impact of more than $9 million compare to last year. Despite the reduced shift plus coverage capacity due to ongoing top-line pressure our ability to align capacity and resources with the amount along with our focus on productivity gains continues to create a role in mitigating headwinds while we work on rebuilding the customer portfolio. Moving on to corporate intersegment on Page 11. External operating income decreased by EUR 0.8 million year-over-year from lower sales building in line with our actual, our annual guidance. Net OpEx after devoicing and D&A slightly increased by EUR 1.4 million, mainly following the impact of the 2 salary indexation and stable over it year-over-year. Adjusted EBIT therefore decreased by EUR 2 million to minus EUR 10 million, while as you could see report EBIT minus EUR 17 million but including G&A cost for EUR 7 million in the quarter. Then we move to the cash flow side on Page 12. The main items we track are the following: cash flow from operating activities before change in working capital stood at EUR 104 million and decreased by EUR 17 million compared to last year, reflecting lower EBITDA partially offset by lower corporate tax payment. Change in working capital and provisions evolve in line with normal seasonality and only decreased by EUR 15 million from minus EUR 149 million in minus EUR 164 million. The cash outflow from investment activities amounted to EUR 25 million, reflecting Capex discipline. This item constitute the main variation in our work free cash flow. The cash flow from operating activities amounted to EUR 85 million a decrease of $36 million compared to last year. This reflects a EUR 54 million lower dividend payment in May, partially offset by higher risk liability outflow and the purchase of the remaining shares of IMEX. Before we get to the Q&A, I am pleased to confirm the re-financing of our maturing syndicated RCF with our banks in late June. We had opted for a sustainability linked format based on 3 KPIs in line with our ESG ambitions. The available facility now amounts to EUR 400 million compared to EUR 300 previously, with a maturity date for June 2029 and 2 1-year extension options. We are now ready for your question. Again 2 questions each will allow everyone to get to a chance to be addressed during the session. Operators please open their lines.

[Operator Instructions] We will take the first question Michiel Declercq of KBC Securities.

The first question is just on the Radial U.S. I have the impression that second quarter came in a bit below what you're guided for the full year. That's the feeling that I have just wondering how should we look at this from a comparable base. At the one end you say that volumes from existing customers are roughly in the trend, but have you seen additional customer losses in the second quarter. Just trying to understand how we should see the comparable for Q3 & Q4? And just to give if this is something that you can comment about where you are with capacity and how much capacity if you are and if you are and if you are at your different centers. Then the Second question is just a bit on the topic from it seems like you're coming well below the EUR 150 million target un the first half but quiet step up in the second. Is it still the plan or how do we see that ?

[indiscernible] So on Radial U.S. I think it's in line with what we were expecting. As explained in fact when we -- if we look back what we have communicated to you in the last part of 2023 in the first quarter. We were seeing an enormous decrease in the same store sale, and we could really see an evolution of our top line, with the decrease of same store sale. Now that same store sale decrease has bottom down and we see a slight recovery that was shown in the chart where when you look at the results from UPS. They have a slide positive steps [indiscernible]. So, in fact, we also see the trend but the impact that we are experiencing in Q2 and moreover we experienced in Q1 was the fact that we lost customers in 2023 and coming back on your question have we seen additional loss of customers the second quarter, the answer is no. But now we are seeing the full year impact of these losses. This is really the explanation for the evolution on the top line. Of course, as in the past, we have the ambition to capture new volumes. And of course, we have not stopped on that one. So far, our capability to add additional customers has been limited and there are multiple reasons for it. So we are also implementing a new strategy in terms of customer portfolio, which is, on one hand, rebalancing towards a more balanced vertical, you know we are extremely exposed to fashion business, which is highly secretive. We would like to move and add some additional verticals, that's one element of that redeployment in our customer portfolio strategy. The second one is also the size of the customers, where we would like to go to more mid-sized markets by the U.S. is not the same. We're not talking about customers of 1 or 2 million as we could experience in Europe. By the way, it's not impacting 1 million or 2 million contracts, but in the U.S. size is bigger than that one. So, the evolution of the portfolio moving in verticals going to customers which are less [ sitical ] also a different size for us customers that it being implemented as Chris already mentioned 2 or 3 times and it was repeated when we gave the guidance in July. This takes time and the full effect of that, we expect to materialize around the peak period of 2025. Of course, it's not an overnight evolution it will be build up gradually but at this stage we are not seeing... It takes time. It's not that we stay idle but we are rebalancing the portfolio and gradually adding new customers. On the capacity side, which is a very good question, of course, our capacity utilization in the warehouse is also lower than what was in the past because we have some customers that left us and left of course empty space in the warehouses. That's also the reason why we are moving the strategy in the customer portfolio, more towards a balanced portfolio of the customers, medium customers and small customers. By the way, very much the strategy that is carrying out since many years, meaning that in the future, of course, we hope to minimize the churn in our customer, but it's unavoidable you always have churn. But when you have 5, 6 or 7 customers in one single warehouse, the effect of the departure of one is mathematically less important than if you have 1 warehouse dedicated to 1 customer. So this is really that rebalancing on the top line that also have or will have a favorable impact on the capacity creation and hence the profitability in [ province ] going forward. You want to add something on the U.S., Chris?

No, I think that exactly like Philippe says, so what you would see in the near term results or efforts to manage the cost and manage the Capex side and the effect of the new top-line you would see in the on-boarding that typically will happen after peak, so we don't expect too much additions any more this year. For those additions, people will wait until the peak period is over and after the peak period will start the on-boarding that will typically also the on-boarding means that somebody moves his whole inventory towards our warehouse. So that also takes typically a couple of week before it is done and before we start seeing revenue stream. So you will see the first results let's say probably the initial signs in the Q3 next year but really signs of that if we have an on-boarding for these clients and we handle the peak for them at the end of next year.

Third part of your question, which is related to the Capex. So, I understand your views, but sometimes it is important to restate your views. The Capex that were seeing in the balance sheet right now is the results of this Capex investment decision dating sometime 6, 12, 18, 24 months ago. Because when you want to add capacity one very good example is the additional capacity that we are currently building in our sorting center in Charleroi, has been decided 18 months ago and is being implemented, so this one will continue to be executed. We had ordered last year some trucks or even 18 months ago some trucks to be delivered before the peak season this year, they will be delivered. So it's -- I mean, the results of this decision of the past. Of course, now we look with Chris what is our forecast and our capacity demand evolution that we are really challenging to make sure that we do not add capacity ahead of having the customers that will be reflected for future Capex outflow. So, this is one element, the second element in this Capex forecast and guidance is the on-boarding of new customers and that of course, and this one we see immediately as a consequence of having on-boarded less customers in the U.S. There is a direct impact on the Capex spending where the lead time is very short because when we onboard these customers, it's big, it's [indiscernible], it's kind of tough, which has a lead time which is around 3 to 6 months. So there is more correlation between the actual level of activity and the Capex.

We will take the next question from Amy Li from UPS.

Maybe just a very quick one on Asian volumes that you touched on that arriving in Belgium which are margin accretive to both your parcel and cross-border businesses. Can you maybe give some color on how significant the volume on your network and what you're seeing in terms of the traction of the Chinese retailers in the domestic market?

So on that one, indeed we see an evolution of what is happening in originating from China. So until now we had the Asian platform like [ Temu ] saying that we are using consolidators like Yanwan, UBI, Yunexpress who are bringing the volumes to Europe. In the past, this consolidated offered very good trade by combining volumes and offering access to postal network for ultra-deliveries. And there, of course, we were well positioned to capture these volumes. Not only for destination Belgium, but also for using our postal licenses to inject volumes in other than Belgium postal networks. There is change now in the market in this platform at which a critical mass and also selling high value goods and they decided to bypass this consolidator and inject directly into European hubs or last mile carriers, some of them who could cover multiple countries like Colis Privé, GLS, Posta nel and also others focusing on the national territories like us which is with the brand of with bpost and Apple Express. And by doing so, they also benefit from moving from untracked product to tracked product which provide a better customer experience compared to the untracked deliveries. So as in this configuration the market for bpost is involved, but we are of course continuing to capture the volume destination Belgium or destination Canada which is still our most profitable product so long story short, impact on top line, but limited impact on EBIT.

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

A couple of questions the domestic Belgium units. So, we've seen a few of operators in Europe negotiating with the authorities for improved U.S. conditions. I'm aware that, of course, [indiscernible]. My question is are there discussions on-going between bpost and the Belgian authorities the further cost savings or operational improvement opportunities going forward. This is the first question. And the second question, still on the operating expense side of the Belgium unit -- about a year ago you were quiet vocal about new Belgium units merging the mail and parcel networks. To what extent you think you have achieved some of those synergies or opportunities. And to what extent do you think to sell more to achieve the future?

So on the conditions, we have new negotiations that needs to lead to a new user agreement with the government by '27, meaning that actually we still have some time left at this point of time. So when this plays, we are only talking with the regulator directly on or tariff cart, and so the last one was recently approved recently in the line with the new the deal with press concessions which was enforced for the periodical, so that was approved recently. Obviously in the light of what we see is happening everywhere that discussion we are preparing for that, we expect that we will have discussions somewhere by mid next into the direction of what us the new use for us going to mean for us in the way how we organize it the quality statements that we need to do in Belgium, the D+1 delivery criteria for 5 days a week and that is for sure will be one under discussion and that is something that we are prepared for. We haven't felt any push back from the government on that side but obviously of course we have today a government [indiscernible] efforts, and we have a new government information but with also in the discussions we had in the preparations of the new government agreement, we don't see yet a strong stance on that. I think that the Belgian government is quite happy with the overall service levels that we deliver and the cost at what we deliver that at this point of time we be more a discussion around how do we handle the climbing mail volumes and how do you remain efficient in that kind of environment that we have a very disruptive approach. That's at least what we expect at this point of time, of course. Once we enter into the negotiation, we will update you on what the specifics are that the government is see for.

So for your question about are we see the benefits of bringing mails and parcels together as opposed to a more regional organization in the past. I would say we have seen some benefits of it and was already visible in last quarter of 2024. We are still convinced that the best way to operate, but we have to recognize that the fact that we were in negotiation with unions about the price concession has put a temporary halt in the reorganization in the distribution network, where we have not be able to realize some savings, synergies, whatever you call it that we weren't expecting. So I would say the Q1, Q2 '23, I would not consider a demonstration of the additional profitability that we could generate by having merged mail and parcel operations together. We intend to restart the reorganization starting September and then we as in the past continue to yield FTE and then Euro savings going forward.

A quick follow-up question. Are you in a position or willing to disclose the cost saving targets for the future or...

I mean cost savings, I'm always very cautious about cost saving what is important is to improve the profitability comes from managing your customer portfolio, managing the prices mix that you are, I think, generating by your customer portfolio, which is still for me the first driver of the profitability and then try to drive efficiencies from cost cutting or optimization typically, what you see, what is happened in the U.S., the variable contribution margin is at its peak. It's good to have it, but as you can see in the U.S. and it's applicable somewhere else as well it can partially offset either decrease of the top-line or the slow growth of the top-line so it cannot be considered in isolation. It's really the combination of the two that we want to pursue. But of course, and again, if I want to come back on the example of the U.S., there is not only the viable contribution margin where you see the improvement, which is very kind of, you can observe it, you can see it in the numbers. The new CEO that we have in the U.S. Craig joined us 6 weeks ago, has already implemented the second way of cost cutting measures, by the way, it has been announced yesterday and will be implemented in the coming days with effect in 2024, but of course full effect in 2025. This is one kind of measure that he has taken. Also in the U.S., we have renegotiated transport freight. And you know it's a big cost line into the P&L, very favorable rate renegotiation that it would have effect in '24 and ‘25. It doesn't mean that all the cost measures will remain in the P&L. It's also a way for us to be more cost effective and improve our capabilities of signing new customers. So that's the reason why I was cautious about only speaking about the cost, more aligning and be efficient and to be also in a position to sign in more contracts in the future.

We'll take the next question from Henk Slotboom from Idea.

First of all, in the press release it says Staci will [ configure ] from this month onwards... and that you expect a contribution of around 8 to 9 million from average per month on EBIT level. I assume that excludes any potential synergy effect. That's my first question. I don't expect that you will say anything about synergies until the next Capital Markets Day. So, I believe it is that. Then secondly, on the provision for bad debts and you can elaborate a little bit about that, have funds gone bust or do they send you no pay or what exactly is happening there. Thirdly, I saw a document in my mailbox [ BIPT ]. I believe it was the day before yesterday where you need to register yourself if you provide parcel services in Belgium. If [indiscernible] on the minimum composition for sub-contractors. And the last question is I saw that you continue to expand the number ATMs in Belgium. Could you perhaps share with us what the percentage is of your parcels that is delivered via the [indiscernible] channel in Belgium.

You're absolutely right. We are targeting an additional 120 million [indiscernible] per month starting from today basically, from Staci. This amount includes a very limited amount of synergies at this stage because it's not that we are not anticipating synergy, we are anticipating synergy both on the top-line front and also on the cost savings front, of which the benefit that we could enjoy from combined consolidating the volume on transport, but to put that in place, it takes time. So far, until yesterday, we could not exchange for obvious reasons of competition, anti-trust. We could not exchange a full condition on transport and now it's available and I can tell you that if it's August and some of our team are on holiday, they will start working to try to identify these synergies that will be gradually implemented, but let's be transparent. It's in 2024 that most of the potential on the top-line, on the cost synergies that could be much realized in 2024 and we will have more than one on the time market day. When it comes to the bad debts of the U.S. just on some single customer I mean, I would say it's unfortunate but it's part of business life. It's no more than that, it's just that they went bankrupt.

On the BDT, that law has been approved for implementation and indeed that means that people who do home delivery of parcels will have to apply that law. Of course this has no impact on the activities of bpost, because bpost had already operating according to that law so it did not change for us and of course we have not yet full visibility. If there would have been an impact on the pricing point that certain of all competitors would have, that is something that we will see when they have to implement that law. From the side of the out of home delivery what we clearly see is Belgium is a market that is still fairly immature compare to other markets, so we still have more than 80% of all [indiscernible] that is actually delivered at the door at this point of time. That is something we expect will actually very quickly change in the coming years, still in the volume that is not delivered at the door you see that the majority of that volume today is delivered in manned PUDO points. So meaning that the parcel points and the postal points and of course our own postal network where those parcels can be delivered. That is where the majority of the out of home delivery is today. There is some volume today already in the and our own postal network we're building that network as we see and we expect that we'll make some reoffending through that, that we will promote the parts where more or less compared to deliver a that the state the same for that we see, of course, [indiscernible] that is something that we expect more for more color than we see in the coming also in those markets have taken site change in the business in the consumer -- so the ore side or were partial approval yesterday will make twice accept a one margin mode deliveries that we're focusing on in the coming years... Thank you very much...

Thank you if there's no further question at this time I'll hand it back over to your host for closing remarks.

Okay. So, if there are no further questions, I would like to thank everybody on the call in fine with us or you want to be interesting questions. We will hear from you at the conference we will going to London. We look forward to stay such and as a reminder for first quarter results will be released on November 8. Thank you very much and have a nice day.